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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

**(MarkOne)**

 

**x****   ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Fiscal Year ended December 31, 2008**

** **

**or**

 

**o****    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                      to                      **

 

**Commission File No. 333-150885**

 

**NCO GROUP, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                    | ** ** | **02-0786880**                     |
|-------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of                |       | (IRS Employer  Identification No.) |
| incorporation or  organization)                 |       |                               |
|                                            |       |                               |
| **507  Prudential Road, Horsham, Pennsylvania** | ** ** | **19044**                          |
| (Address of  principal executive offices)       |       | (Zip Code)                         |

 

Registrant’stelephone number, including area code  **(215) 441-3000**

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.
|   | Yes o | No x |
|--------|-------|------|

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.              
|   | Yes o | No x |
|--------|-------|------|

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
|   | Yes x | No o |
|--------|-------|------|

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.      x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. 

 

| Large accelerated filer o                                              |   | Accelerated filer o          |
|------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated filer x  (Do not check if a smaller reporting company) |   | Smaller reporting  company o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).
|   | Yes o | No x |
|--------|-------|------|

 

The aggregatemarket value of the registrant’s voting stock held by non-affiliates is zero.The registrant is a privately held corporation.

 

The number of shares ofeach of the registrant’s classes of common stock outstanding as of March 31,2009 was: 2,936,885 shares of Class A common stock, $0.01 par value, and400,894 shares of Class L common stock, $0.01 par value.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **        | ** **                                                                                                               | **Page** |
|-------------------|--------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                                                     |
| **Item  1.**      | **Business**                                                                                                             | 2        |
| **Item 1A.**      | **Risk Factors**                                                                                                         | 18       |
| **Item 1B.**      | **Unresolved  Staff Comments**                                                                                           | 37       |
| **Item 2.**       | **Properties**                                                                                                           | 37       |
| **Item 3.**       | **Legal Proceedings**                                                                                                    | 37       |
| **Item 4.**       | **Submission  of Matters to a Vote of Security Holders**                                                                 | 39       |
| ** **        | ** **                                                                                                               |     |
| **PART II**  |                                                                                                                     |
| ** **        |                                                                                                                     |
| **Item 5.**       | **Market for Registrant’s  Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity  Securities** | 39       |
| **Item 6.**       | **Selected Financial Data**                                                                                              | 40       |
| **Item 7.**       | **Management’s  Discussion and Analysis of Financial Condition and Resultsof Operations**                           | 41       |
| **Item 7A.**      | **Quantitative  and Qualitative Disclosures about Market Risk**                                                          | 59       |
| **Item 8.**       | **Financial  Statements and Supplementary Data**                                                                         | 59       |
| **Item 9.**       | **Changes in  and Disagreements with Accountants on Accounting And Financial Disclosure**                                | 60       |
| **Item 9A(T).**   | **Controls and  Procedures**                                                                                             | 60       |
| **Item 9B.**      | **Other Information**                                                                                                    | 62       |
| ** **        | ** **                                                                                                               |     |
| **PART III** |                                                                                                                     |
| ** **        |                                                                                                                     |
| **Item 10.**      | **Directors,  Executive Officers and Corporate Governance**                                                              | 63       |
| **Item 11.**      | **Executive  Compensation**                                                                                              | 66       |
| **Item 12.**      | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                     | 90       |
| **Item 13.**      | **Certain  Relationships and Related Transactions, andDirector Independence**                                            | 92       |
| **Item 14.**      | **Principal  Accounting Fees and Services**                                                                              | 94       |
| ** **        | ** **                                                                                                               |     |
| **PART IV**  |                                                                                                                     |
| ** **        |                                                                                                                     |
| **Item. 15.**     | **Exhibits,  Financial Statement Schedules**                                                                             | 95       |
| ** **        | **Signatures**                                                                                                           | 104      |
| ** **        | ** **                                                                                                               |     |
| ** **        | **Index to Consolidated Financial Statements**                                                                           | F-1      |

 

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As used in this Annual Report on Form 10-K,unless the context otherwise requires, “we,” “us,” “our,” “Company” or “NCO”refers to NCO Group, Inc., and its subsidiaries.

 

**Forward-Looking Statements**

 

Certain statementsincluded in this Annual Report on Form 10-K, other than historical facts,are forward-looking statements (as such term is defined in the SecuritiesExchange Act of 1934, as amended, and the regulations thereunder), which areintended to be covered by the safe harbors created thereby. Forward-lookingstatements include, without limitation, statements as to:

 

·                  the Company’sexpected future results of operations;

·                  economicconditions;

·                  the Company’sbusiness and growth strategy;

·                  fluctuations inquarterly operating results;

·                  the integrationof acquisitions;

·                  the finaloutcome of the Company’s litigation with its former landlord;

·                  the effects ofterrorist attacks, war and the economy on the Company’s business;

·                  expectedincreases in operating efficiencies;

·                  anticipatedtrends in the business process outsourcing industry, referred to as BPO;

·                  estimates offuture cash flows and allowances for impairments of purchased accountsreceivable;

·                  estimates ofintangible asset impairments and amortization expense of customer relationshipsand other intangible assets;

·                  the effects oflegal proceedings, regulatory investigations and tax examinations;

·                  the effects ofchanges in accounting pronouncements; and

·                  statements as totrends or the Company’s or management’s beliefs, expectations and opinions.

 

The words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,”“guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” andsimilar expressions are typically used to identify forward-looking statements.These statements are based on assumptions and assessments made by the Company’smanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees of theCompany’s future performance and are subject to risks and uncertainties and maybe affected by various factors that may cause actual results, developments andbusiness decisions to differ materially from those in the forward-lookingstatements. Some of the factors that may cause actual results, developments andbusiness decisions to differ materially from those contemplated by suchforward-looking statements include:

 

·                  risks related tothe instability in the financial markets;

·                  risks related toadverse capital and credit market conditions;

·                  the ability ofgovernmental and regulatory bodies to stabilize the financial markets;

·                  risks related tothe domestic and international economies;

·                  risks related toderivative transactions;

·                  risks related tothe Company’s ability to grow internally;

·                  risks related tothe Company’s ability to compete;

·                  risks related tothe Company’s substantial indebtedness and its ability to service such debt;

·                  risks related tothe Company’s ability to meet liquidity needs;

 

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·                  the risk thatthe Company will not be able to implement its growth strategy as and whenplanned;

·                  risks associatedwith growth and acquisitions;

·                  the risk thatthe Company will not be able to realize operating efficiencies in theintegration of its acquisitions;

·                  fluctuations inquarterly operating results;

·                  risks related tothe timing of contracts;

·                  risks related topurchased accounts receivable;

·                  risks related topossible impairment of goodwill and other intangible assets;

·                  the Company’sdependence on senior management;

·                  risks related tosecurity and privacy breaches;

·                  risks related tounion organizing efforts at the Company’s facilities;

·                  risks associatedwith technology;

·                  risks related tothe final outcome of the Company’s litigation with its former landlord;

·                  risks related tolitigation, regulatory investigations and tax examinations;

·                  risks related topast or possible future terrorist attacks;

·                  risks related tonatural disasters or the threat or outbreak of war or hostilities;

·                  the risk thatthe Company will not be able to improve margins;

·                  risks related tothe Company’s international operations;

·                  risks related tothe availability of qualified employees, particularly in new or morecost-effective locations;

·                  risks related tocurrency fluctuations;

·                  risks related toreliance on independent telecommunications service providers;

·                  risks related toconcentration of the Company’s clients in the financial services,telecommunications and healthcare sectors;

·                  risks related topotential consumer resistance to outbound services;

·                  risks related tothe possible loss of key clients;

·                  risks related tochanges in government regulations affecting the teleservices andtelecommunications industries;

 

The Company cangive no assurance that any of the events anticipated by the forward-lookingstatements will occur or, if any of them does, what impact they will have onour results of operations and financial condition. The Company disclaims anyintent or obligation to publicly update or revise any forward-lookingstatements, regardless of whether new information becomes available, futuredevelopments occur or otherwise. For additional information concerning therisks that affect us, see “Part I. — Item 1A. Risk Factors” of this Reporton Form 10-K.

 

**PART I**

 

**Item 1.****                                   Business**

** **

**General**

 

On November 15,2006, NCO Group, Inc. was acquired by and became a wholly owned subsidiaryof Collect Holdings, Inc., a Delaware corporation founded in 2006 andcontrolled by One Equity Partners and its affiliates, with participation byMichael J. Barrist, Chairman, President and Chief Executive Officer of NCOGroup, Inc., certain other members of executive management and otherco-investors, referred to as the Transaction. Subsequent to the date of theTransaction, NCO Group, Inc. was merged with and into Collect Holdings, Inc.,and Collect Holdings, Inc. was renamed NCO Group, Inc.

 

We are a holdingcompany and conduct substantially all of our business operations through oursubsidiaries. NCO is a leading provider of business process outsourcingservices, referred to as 

 

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BPO, primarily focused onaccounts receivable management, referred to as ARM, and customer relationshipmanagement, referred to as CRM. We provide a wide range of ARM services to ourclients by utilizing an extensive technological infrastructure. Althoughtraditional ARM services have focused on the recovery of delinquent accounts,we also engage in the recovery of current accounts receivable and early stagedelinquencies (generally, accounts that are 180 days or less past due). Our CRMservices allow our clients to strengthen their customer relationships byproviding a high level of support to their customers and generate incrementalsales by acquiring new customers. We support essential business functionsacross key portions of the customer life cycle including acquisition, growth,care, resolution and retention. The primary market sectors we support in ourBPO business are financial services, telecommunications, healthcare, retail andcommercial, utilities, education, technology, transportation/logistics andgovernment. We also purchase and collect past due consumer accounts receivablefrom consumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies, and other consumer-oriented companies. Weoperate our business in three segments: ARM, CRM and Portfolio Management.

 

Our extensiveindustry knowledge, technological expertise, management depth, internationalscale, broad service offerings and long-standing client relationships enable usto deliver customized solutions that help our clients reduce their operatingcosts, increase cash flow, and improve their customers’ experience. We provideour services through our customer-driven model that provides optimalperformance, leading-edge technology, proven efficiency and quality, to a widerange of clients in North America and abroad. We currently have approximately33,900 full and part-time employees (including approximately 1,300 non-employeepersonnel utilized through subcontractors) who provide our services through ournetwork of over 100 offices in 10 countries.

 

Our website iswww.ncogroup.com. We make available on our website, free of charge, our annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and all amendments to those reports, filed or furnishedpursuant to Section 13(a) or 15(d) of the Exchange Act, as soonas reasonably practicable after such material is electronically filed with orfurnished to the SEC.

 

In addition, wewill provide to our investors, at no cost, paper or electronic copies of ourreports and other filings (excluding exhibits) made with the SEC. Requestsshould be directed to:

 

NCO Group, Inc.

507 PrudentialRoad

Horsham, PA  19044

Attention:  Investor Relations

 

The information onthe website listed above, is not and should not be considered part of thisAnnual Report on Form 10-K and is not incorporated by reference in thisdocument. This website is, and is only intended to be, an inactive textualreference.

 

**IndustryBackground**

 

Companies are outsourcing manyessential, non-core business functions in order to focus on revenue-generatingactivities and core competencies, reduce costs and improve productivity andservice levels. In particular, many large corporations are recognizing theadvantages of outsourcing accounts receivable management and customer serviceand support. This trend is being driven by a number of industry-specificfactors, including:

 

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·                  an increase inthe complexity of collection and other customer service processes, whichrequires sophisticated call management and database systems for efficientoperations;

·                  the lack ofexpertise, resources and infrastructure necessary to provide optimal customersupport due to the growing scope and complexity of such activities;

·                  significanteconomies of scale achievable by third parties with focused capabilities; and

·                  a trend incertain industries to outsource essential, non-core functions due to competitivepressures, regulatory considerations and/or required capital expenditures.

 

Wecurrently focus on the ARM and CRM segments of the BPO market. Both of theseindustry segments have experienced growth in recent years, driven by theincreasing penetration of outsourcing services, the continuing growth inconsumer and commercial debt, an increased focus on building long-term customerrelationships and a shift away from large scale in-house implementations toBPO.

 

The BPO industry is highlyfragmented in the U.S. The leading providers of BPO services are largemultinational companies. We believe that many smaller competitors haveinsufficient capital to expand and invest in technology and are unable to meetthe geographic coverage, and regulatory requirements and quality standardsdemanded by businesses seeking to outsource their essential, non-core businessfunctions.

 

**BusinessStrategy**

 

Ourprimary business strategy is to strengthen our position in the ARM and CRMmarkets, and to opportunistically expand our service offerings to othercomplementary BPO services.

 

**Expandour relationships with clients** – An integral component of ourgrowth strategy is focused on the expansion of existing client relationships.We plan to continue to grow these relationships and the resulting opportunitiesin both scale and depth. We believe these relationships will continue totransition from vendor relationships, focusing on the operational delivery ofservices, to strategic partnerships focused on long-term, goal-orienteddelivery of services. A key focus of this strategy is leveraging existingclient relationships in one market to cross-sell our services in other markets.

 

**Enhanceour operating margins** – We intend to continue pursuing thefollowing initiatives to increase profitability:

 

·                  standardizationof systems and practices;

·                  consolidation offacilities;

·                  automation ofclerical functions;

·                  utilization ofnear shore and offshore labor;

·                  use ofstatistical analysis to improve performance and reduce operating expenses;

·                  use of segmentationstrategy to improve profitability; and

·                  leveraging ourinternational size and presence.

 

#### **Continuouslyimprove business processes**– Weintend to continue developing and enhancing our technology and infrastructurewith initiatives that improve the efficiency of our operations and enhanceclient service. Examples of our recent initiatives include:

#### ** **

·*Enhanced data management and analytics: *We have implemented both client-specific and pooled segmentation models tofocus better our collections efforts. These models, coupled with iterativesegment-based treatment testing, provide benefits by reducing operating expenseand 

 

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increasing collectionrevenues. Segmentation allows us to focus resources on accounts with thehighest likelihood of recovery, and devote less costly resources to lowerprobability accounts. Additionally, we began applying the use of segmentationmodels to make more strategic portfolio purchase decisions.

 

·*Online access for our clients’ customers: *We implemented a self-service website to allow our clients’ customersto access their accounts with us. Customers can use the website to update theiraccount information, request statements and make payments. We plan to expandthe functionality of the website to enhance customer service and improvecollections for our clients.

 

·*Pattern recognition system:*  Our pattern recognition system is designed todetermine the patterns and profiles that precede customer decisions such aspurchase or defection. Leveraging predictive analytic technologies increasesthe ability to predict customers’ behaviors, thus improving the results of theoutsourced solutions we provide to our clients, as well as improving ourpurchased portfolio analytics, while reducing our costs.

 

· *Technology upgrades:*  We are continuously upgrading and fine-tuningour technology to meet current and future client needs, while maximizing ourinvestment through aggressive re-use philosophy wherever possible.

 

· *Enhanced data security:* We continue to deployboth physical and system security enhancements to help ensure ongoingprotection and privacy of NCO’s and clients’ data as well as network andsystems hardening. We incorporate sophisticated password, access andauthentication controls, and emphasize security awareness training programs.

 

**Expandinternationally** – We believe that the BPO industry is gainingwidespread acceptance throughout Canada, Europe, the Asia-Pacific region andLatin America. Our international expansion strategy is designed to continue tocapitalize on each of these markets in the near term, as well as continue todevelop access to lower-cost foreign labor. We believe we are a leadingprovider of BPO services in Canada, the United Kingdom, Europe and Australia.During 2008, we expanded our presence in Australia, and began providingservices in Mexico, both through acquisitions. We expect to further penetrateall of these markets through increased sales of ARM and CRM services, as wellas through the pursuit of accounts receivable purchasing opportunities.Additionally, we expect to pursue direct investments, strategic alliances andpartnerships as well as further explore acquisitions in these markets and othermarkets.

 

**Continueto pursue debt purchasing opportunities** – Since 1999, we haveexpanded our portfolio purchase platform. In 2005, we expanded our presence inthe medical and utilities industries, as well as with telecommunicationcompanies and credit card issuers. We purchased an aggregate of $126.5 million(in terms of cost) of portfolios of accounts receivable in 2008. Our strategicplan focuses on purchasing larger portfolios of accounts receivable and medicalreceivables, for which we currently believe there is less competition; however,we also expect that in the near future, we may limit our overall investment inportfolio purchases.

 

Through enhancedanalysis of portfolio performance and utilizing the collections experience ofour ARM business for similar classes of debt, we have been able to target themost profitable segments within available portfolios. In order to facilitateour purchase of large portfolios of accounts receivable, we have an agreementwith a lender to finance such purchases on a nonrecourse basis. We also sellcertain older, unresolved accounts and bankruptcy status accounts based on alow probability of payment under our collection platform and other criteria.These accounts can generally be sold currently for more than we can collectover time, net of servicing costs.

 

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While ourprincipal portfolios continue to be larger credit card and U.S.-based consumerreceivables, we have expanded our purchases to include telecommunications,utilities, medical and international purchase opportunities.

 

**Pursuestrategic acquisition opportunities**– We have developed adisciplined approach to acquisitions. We believe our approach enables us toefficiently integrate acquired businesses, personnel and facilities into ourexisting technology platform, personnel matrix and facilities. By leveragingour shared services and infrastructure, we facilitate the realization of costsynergies and growth of sales and earnings. We intend to evaluate and pursuestrategic acquisitions on an opportunistic basis as they become available.

 

In January 2008,we acquired Systems & Services Technologies, Inc., referred to asSST, a third-party consumer receivable servicer. In February 2008, weacquired Outsourcing Solutions Inc., referred to as OSI, a leading provider ofbusiness process outsourcing services, specializing primarily in accountsreceivable management services. During 2008, we also acquired several smallercompanies, all of which were providers of ARM services.

 

**OurServices**

 

We provide thefollowing BPO services:

 

**AccountsReceivable Management**

 

We provide a widerange of ARM services to our clients by utilizing an extensive technologicalinfrastructure. Although traditional ARM services have focused on the recoveryof delinquent accounts, we also engage in the recovery of current accountsreceivable and early stage delinquencies (generally, accounts that are 180 daysor less past due). We generate ARM revenue from the recovery of delinquentaccounts receivable on a contingency fee basis and from contractual collectionservices and other related services.

 

ARM servicestypically include the following activities:

 

***Engagement Planning.***  We customize solutions for our clients basedon a number of factors, including account size and demographics, the client’sspecific requirements and our management’s estimate of the collectibility ofthe account. We integrate our standard processes for accounts receivablemanagement, developed from decades of accumulated experience, to create acustomized recovery solution. In many instances, the approach will evolve andchange as the relationship with the client develops, and both parties evaluatethe most effective means of recovering accounts receivable. Our systematicapproach to accounts receivable management removes most decision making fromthe recovery staff and is designed to ensure uniform, cost-effectiveperformance.

 

Once the approachhas been defined, we electronically or manually transfer pertinent client datainto our information system. When the client’s records have been established inour system, we begin the recovery process.

 

***Account Notification.***  We initiate the recovery process byforwarding a preliminary letter that is designed to seek payment of the amountdue or open a dialogue with the client’s customers. This letter also serves asan official notification to each client’s customer of his or her rights asrequired by the Federal Fair Debt Collection Practices Act. We continue therecovery process with a series 

 

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of mail and telephonenotifications. Telephone representatives remind the client’s customer of theirobligation, inform them that their account has been placed for collection withus and begin a dialogue to develop a payment program.

 

***Skip Tracing.***  In cases where the client’s customer’scontact information is unknown, we systematically search the U.S. Post OfficeNational Change of Address service, consumer databases, electronic telephonedirectories, credit agency reports, tax assessor and voter registrationrecords, motor vehicle registrations, military records, and other sources. Thegeographic expansion of banks, credit card companies, national and regionaltelecommunications companies, and national and regional hospital chains, alongwith the mobility of consumers, has increased the demand for locating theclient’s customers. Once we have located the client’s customer, thenotification process can begin.

 

***First Party Early Stage Delinquency Calls.*** Although companies understand the importanceof contacting customers early in the delinquency cycle, some do not possess theresources necessary to sustain consistent and cost-effective outbound telephonecampaigns. We provide a customized, service approach to contact our clients’customers and remind them of their obligation to pay their accounts.

 

We typicallyconduct reminder calls in the client’s name to recently past due customers andcourtesy collection calls to more seriously delinquent customers. Ourrepresentatives leave courteous messages if telephone contact attempts areunsuccessful after the second day.

 

***Third Party Collection Services.***  The most common challenges encountered bycompanies are how to prompt seriously delinquent customers to make paymentbefore they are charged off as uncollectible or to collect the full balanceafter charge-off. Our third party collection services communicate a sense ofurgency to seriously delinquent customers during these periods, reducing netcharge-offs and the cost of collection.

 

***Credit Reporting.***  Credit bureau reporting is used as acollection tool in accordance with NCO’s policy, applicable laws, and clientguidelines. At a client’s request, we will electronically report delinquentaccounts to one or more of the national credit bureaus where it will remain fora period of up to seven years. The possible denial of future credit oftenmotivates the resolution of past due accounts.

 

***Payment Processing.***  After we receive payment from the client’scustomer, depending on the terms of our contract with the client, we can eitherremit the amount received minus our fee to the client or remit the entireamount received to the client and subsequently bill the client for ourcollection services.

 

***Activity Reports.***  Clients are provided with a system-generatedset of customized reports that fully describe all account activity and currentstatus. These reports are typically generated monthly; however, the informationincluded in the report and the frequency that the reports are generated can bemodified to meet the needs of the client.

 

***Quality Tracking.***  We emphasize quality control throughout allphases of the accounts receivable management process. Some clients may specifyan enhanced level of supervisory review and others may request customizedquality reports. For example, large financial services organizations willtypically have exacting performance standards which require sophisticatedcapabilities, such as documented complaint tracking and specialized software totrack quality metrics to facilitate the comparison of our performance to thatof our peers.

 

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**CustomerRelationship Management**

 

Our CRM servicesallow our clients to strengthen their customer relationships by providing ahigh level of support to their customers and generate incremental sales byacquiring new customers. We design and implement customized outsourced customercare solutions including the following:

 

***Customer Care and Retention. ***Our representatives specialize in developing andmaintaining the relationships that our clients value. Customer care programsvary depending upon each client’s specific goals, but often include servicessuch as customer development and outbound and inbound calling campaigns. Ourrepresentatives handle customer care inquiries such as billing questions,product and service inquiries, and complaint resolution. We also place calls onbehalf of clients in welcoming new customers, retaining current customers,delivering notifications and conducting market research or satisfactionsurveys. Our programs include specialized training in order to ensure that eachrepresentative is a seamless extension of our clients’ businesses.

 

***Customer Acquisition and Sales.***  We support inbound and outbound sales effortsby conducting customized programs designed to acquire new customers, renewcurrent customers, and win back or win over targeted customers. We executemultiple phases of the sales order process, pre- and post-sale, from answeringproduct related questions and making sales presentations to up selling, crossselling and order processing.

 

***Product and Technical Support. ***In support of theincreasing dependence of customers and businesses on technology, prompt andaccurate responses to technology inquires, product-related support issues, andservice related concerns has become a cornerstone to maintaining high customersatisfaction and achieving retention goals. Our product support servicesinclude help desk, troubleshooting, warranty, recall, and upgrade support. Westrive for first call resolution and are committed to meeting client servicelevel requirements. We believe that our highly trained customer contact staffis knowledgeable in all components of technical support and help desk relatedservice requirements, and is adept at troubleshooting, evaluation andescalation procedures and resolving complaints quickly and effectively toincrease our clients’ customer retention and loyalty.

 

***Interactive Voice Response. ***We use interactive voice response (IVR) technologyto cost-effectively facilitate customer care for our clients. Customers canefficiently obtain account balance information, transfer funds, place an order,check status of an order, pay a bill, or answer a survey. Incoming calls arerouted to representatives through systematic call transfer protocols or as aresult of a toll-free number being included on customer correspondence. Theprocess is completely automated, and if the caller wants to speak to arepresentative they can choose to be connected to a live NCO customer serviceprofessional. This combination of live and recorded telephone interactionbenefits the customer through efficient, 24-hour service, and decreasedoperating costs.

 

***Email Management. ***Animportant component to attracting and retaining customers is easy accessibility.Our email management services allow our clients’ customers to communicate withthem day or night, 24 hours a day, seven days a week. Our response generationand intelligent routing provide an efficient means to respond to customer needswhile increasing our clients’ operational effectiveness and decreasing theircosts.

 

***Web Chat. ***Wehave the ability to communicate with clients’ customers through our live Webchat service. Faster than email, our Web chat solution allows customers tointeract with agents in real time. We can leverage our Web chat technology toprovide customer care, answer product questions, or offer technical support.

 

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***In-Language Contact.*** Our global network of call centers support allmajor languages, including English, Spanish, French, Arabic, Korean, Hindi,Polish, Russian, Tagalog, and numerous Asian dialects. We have a wealth ofexperience supporting multilingual programs and can work with clients to meetany language requirement.

 

***Analytic Services.***  We have a pattern recognition system designedto enhance client results by determining the patterns and profiles that precedecustomer decisions such as purchase or defection. Leveraging predictiveanalytic technologies increases the ability to predict customers’ behavior thusimproving the results of the outsourced solutions we provide to our clients.

 

**PortfolioManagement**

 

Our PortfolioManagement business segment purchases and manages portfolios of purchasedaccounts receivable. With over 20 years of experience and an internal databaseof over 350 million customer accounts, we believe the breadth of our ARMbusiness provides unique insight into a wide variety of credit portfolios.Additionally, our scale and proprietary valuation techniques, supported by asignificant amount of historical collection data, give us critical competitivedifferentiation in purchasing receivables. As customers tend towards offeringlarger portfolios, larger participants such as ourselves are better positionedto gain market share.

 

Our portfolios ofpurchased accounts receivable consist primarily of delinquent consumer accountsreceivable, which represent the unpaid debts of individuals to consumercreditors such as banks, finance companies, retail merchants, utilities,healthcare companies, and other consumer-oriented companies. We typicallypurchase accounts that are 36 to 60 months past due. In 2008, we purchased anaggregate of $4.2 billion face amount of delinquent consumer accountsreceivable for a cost of $126.5 million. Collection services for the portfoliosare primarily provided to Portfolio Management by our ARM business segment.

 

**AdditionalServices**

 

We selectivelyprovide other related services that complement our traditional ARM and CRMbusinesses and leverage our technological infrastructure. We believe that thefollowing services will provide additional growth opportunities for us:

 

***Consumer Loan Servicing.***  Through our subsidiary SST, we provideconsumer loan servicing for a variety of consumer assets through an end-to-endservicing model, from asset generation to deficiency collections.

 

***Attorney Network Services.***  We coordinate and implement legal collectionsolutions undertaken on behalf of our clients through the management ofnationwide legal resources specializing in collection litigation. Ourcollection support staff manages the attorney relationships and facilitates thetransfer of necessary documentation.

 

***NCOePayments.***  We provide our clients’ customers withmultiple secure payment options, accessible via the telephone and the Internet,24 hours a day, 365 days a year. We also provide contact center solutionsutilizing our extranet technology, allowing representatives to take paymentsdirectly from the customer.

 

***Financial Investigative Services.***  We develop the information needed to profilecommercial debtors and make decisions affecting extensions of credit. Ourinvestigators uncover background 

 

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and financial data usingresources such as asset and liability searches, background investigations, andchain of title investigations.

 

***Order Processing.***  We support multiple phases of orderprocessing, including answering product-related questions and making salepresentations, up selling and cross selling, order entry, and providingpost-sale support.

 

***Back Office Support. ***Wecoordinate customizable back office solutions including billing, paymentprocessing, medical certification, bankruptcies, and accounting.

 

**Technologyand Infrastructure**

 

We have implemented ascalable technical infrastructure that can flexibly support growing clientvolume while delivering a high level of reliability and service. Our customercontact centers feature advanced technologies, including predictive dialers,automated call distribution systems, digital switching, Voice over InternetProtocol (“VoIP”) technologies, digital recording, workforce management systemsand customized computer software, including the NCO ACCESS Interface Manager.This is a graphical user interface we developed for use in large-scaleoutsourcing engagements that enables better data integration, enhancedreporting, representative productivity, implementation speed, andsecurity.  As a result, we believe we areable to address outsourced business process activities more reliably and moreefficiently than our competitors. Our IT staff is comprised of over 500professionals. We provide our services through the operation of over 100centers that are linked through an international wide area network.

 

We maintain disasterrecovery contingency plans and have implemented procedures to protect againstthe loss of data resulting from power outages, fire and other casualties. Webelieve fast recovery and continuous operation are ensured with multipleredundancies, uninterruptible power supplies and contracted backup and recoveryservices. We have implemented security systems to protect the integrity andconfidentiality of our computer systems and data, and we maintain comprehensivebusiness interruption and critical systems insurance on our telecommunications andcomputer systems. Our systems also permit secure network access to enableclients to establish real time communications with us and monitor operationalactivity. We employ a variety of industry leading measures including advancedfirewalls, data encryption, role specific access permissions, and site securityto ensure data remains safe and secure. We continue to be an early adopter ofthe Credit Card Industry best practices and compliance for data protection. ALevel I, audit/assessment is conducted annually by an outside third-party firm,resulting in the satisfactory compliance with the Payment Card Industry (“PCI”),VISA Cardholder Information Security Program (“CISP”), MasterCard Site DataProtection (“SDP”) Program and American Express Data Security System (“DSS”)requirements. VISA and MasterCard have validated NCO as a Level I provider,which is the most stringent level in the PCI schema.

 

Our ARM call centersutilize both virtual and onsite predictive dialers with a total of over 6,800stations to address our low-balance, high-volume accounts, and our CRM centersutilize approximately 600 predictive dialer stations to conduct our clients’outbound calling campaigns. These systems scan our databases, simultaneouslyinitiate calls on all available telephone lines, and determine if a liveconnection is made. Upon determining that a live connection has been made, thecomputer immediately switches the call to an available representative andinstantaneously displays the associated account record on the representative’sworkstation. Calls that reach other signals, such as a busy signal, telephonecompany intercept or no answer, are tagged for statistical analysis and placedin priority recall queues or multiple-pass calling cycles. NCO systems alsoautomate almost all record keeping and workflow activities including letter andreport generation. We believe 

 

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that our automated methodof operations dramatically improves the productivity of our staff.

 

**QualityAssurance and Client Service**

 

We believe areputation for quality service is critical to acquiring and retaining clients.Therefore, our representatives are supervised, by both NCO and our clients, forstrict compliance with client specifications, our policies, and applicable lawsand regulations. We regularly measure the quality of our services by capturingand reviewing such information as the amount of time spent talking with clients’customers, level of customer complaints and operating performance. In order toprovide ongoing improvement to our telephone representatives’ performance andto ensure compliance with our policies and standards, as well as federal, stateand local guidelines, quality assurance personnel supervise each telephonerepresentative on a frequent basis and provide ongoing training to therepresentative based on this review. Our information systems enable us toprovide clients with reports on a real-time basis as to the status of theiraccounts and clients can choose to network with our computer system to accesssuch information directly.

 

We maintain aclient service department to promptly address client issues and questions andalert senior executives of potential problems that require their attention. Inaddition to addressing specific issues, a team of client servicerepresentatives contact clients on a regular basis in order to establish aclose relationship, determine clients’ overall level of satisfaction, andidentify practical methods of improving their satisfaction.

 

**ClientRelationships**

 

Our active client base currentlyincludes over 14,000 companies in the financial services, telecommunications,healthcare, retail and commercial, education and government, utilities,technology and transportation/logistics sectors. Our 10 largest clients in 2008accounted for approximately 39 percent of our consolidated revenue. Our largestclient during the year ended December 31, 2008, was in the telecommunicationssector and represented 8.3 percent of our consolidated revenue for the yearended December 31, 2008. While our CRM division relies on revenue from afew key clients, none of these clients represented more than 10 percent of ourconsolidated revenue. In 2008, we derived 31.7 percent of our revenue fromfinancial services (which includes the banking and insurance sectors), 21.9percent from telecommunications companies, 12.4 percent from healthcareorganizations, 11.0 percent from retail and commercial entities, 8.8 percentfrom education and government organizations, 7.6 percent from utilities, 3.4percent from technology companies and 3.2 percent from transportation/logisticscompanies, in each case excluding purchased accounts receivable.

 

Our ARM contractsgenerally define, among other things, fee arrangements, scope of services andtermination provisions. Clients may usually terminate such contracts on 30 or60 days notice. In the event of termination, however, clients typically do notwithdraw accounts referred to us prior to the date of termination, thusproviding us with an ongoing stream of revenue from such accounts, whichdiminishes over time. Under the terms of our contracts, clients are notrequired to place accounts with us but do so on a discretionary basis.

 

Our CRM contractsare generally for terms of up to three years. Contracts are typicallyterminable by either party upon 60 days notice; however, in some cases,particularly in our longer term inbound contracts which often requiresubstantial capital expenditures on our part, a client may be required to payus a termination fee in connection with an early termination of the contract.

 

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In addition,certain inbound CRM contracts may contain minimum volume commitments requiringour clients to provide us with agreed-upon levels of calls during the terms ofthe contracts. Our fees for services rendered under these contracts are basedon pre-determined contracted chargeable rates that may include a base rate perminute or per hour plus a higher rate or “bonus” rate if we meet pre-determinedobjective performance criteria, such as sales generated during a definedperiod, and may be reduced by any contractual monthly performance penalties towhich the client may be entitled. Additionally, we may receive additionaldiscretionary client determined bonuses based upon criteria established by ourclients.

 

Some of ourcustomer contracts provide for limited currency rate protection below certainpre-determined exchange rate levels and limited gain sharing above certainpre-determined exchange rate levels. Such contracts may mitigate certaincurrency risks, however, there can be no assurance that new contracts will besuccessfully negotiated with such provisions or that existing contractprovisions will result in the reduction of currency risk for such contracts.

 

On occasion weenter into “forward-flow” agreements for the purchase of accounts receivablefrom consumer credit grantors. A forward-flow agreement is a commitment topurchase a defined volume of accounts from a seller for a designated period oftime at a fixed price. The terms of the agreements vary; some may be terminatedby the seller with either 30 days, 60 days or 90 days written notice.

 

**Personneland Training**

 

Our success inrecruiting, hiring and training a large number of employees is critical to ourability to provide high quality BPO services to our clients. We seek to hirepersonnel with previous experience in the industry or with experience astelephone representatives. We generally offer internal promotion opportunitiesand competitive compensation and benefits.

 

All of our callcenter personnel receive comprehensive training that consists of three stages:introduction training, behavioral training and functional training. Theseprograms are conducted through a combination of classroom and role-playingsessions. Prior to customer contact, new employees receive one week of trainingin our operating systems, procedures and telephone techniques and instructionin applicable federal and state regulatory requirements. Our personnel alsoreceive a wide variety of continuing professional education and on-goingrefresher training, as well as additional product training on an as-neededbasis.

 

As of December 31,2008, we had a total of approximately 27,600 full-time employees and 5,000part-time employees, of which approximately 17,500 were telephonerepresentatives. In addition, as of December 31, 2008, we utilizedapproximately 1,300 telephone representatives through subcontractors. Webelieve that our relations with our employees are good.

 

Typically ouremployees are not represented by a labor union; however, in February 2006,our employees in Surrey, British Columbia, Canada voted in favor of joining theB.C. Government and Services Employees’ Union, and a collective agreement wasratified in the first quarter of 2007. From time to time, our facilities aretargeted by union organizers. We are not aware of any union organizing effortsat any of our other facilities.

 

**Salesand Marketing**

 

Our sales force isorganized into two functional groups to best match our sales professionals’experience and expertise with the appropriate target market. The commercialsales group consists of 

 

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approximately 60telephone sales representatives who specialize in business-to-business BPOsolutions for small to mid-sized companies. Our core sales force, composed ofapproximately 50 sales professionals, is organized by industry and geographicallocation to ensure the highest level of focus and service to potential andexisting business partners. This group is focused on forming and cultivatingstrategic, long-term partnerships with large, multinational firms in order tomaximize outsourcing opportunities via our full suite of BPO services.

 

We have a ClientRelationship Management system that provides tools to support both sales andoperations in the management of client relationships from initialidentification of a prospect to the care and retention of long-term clients.

 

Our in-house marketingdepartment provides innovative customer contact solutions and sales support byperforming a wide range of personalized services such as customer databaseadministration, advertising, marketing campaigns and direct mailings,collateral development, trade show and site visit management, market andcompetitive research, and more. We also maintain a dedicated team of skilledwriters who prepare detailed, professional responses to formal requests forproposals and requests for information.

 

**Competition**

 

The BPO industry is highlycompetitive. We compete with a large number of ARM providers, including largenational corporations such as Alliance One, GC Services LP and iQor, Inc.,as well as many regional and local firms. We also compete with large CRMproviders such as Convergys Corporation, ICT Group, TeleTech Holdings, Inc.,and West Corporation. Some of our competitors may offer more diversifiedservices and/or operate in broader geographic areas than we do. In addition,many companies perform the BPO services offered by us in-house. Moreover, manylarger clients retain multiple outsourcing providers, which exposes us tocontinuous competition in order to remain a preferred vendor. We believe thatthe primary competitive factors in obtaining and retaining clients are theability to provide customized solutions to a client’s requirements,personalized quality service, sophisticated call and information systems, and acompetitive price.

 

Our Portfolio Management segmentcompetes with other purchasers of delinquent consumer accounts receivable, suchas Asset Acceptance Capital Corp., Encore Capital Group, Inc. andPortfolio Recovery Associates, Inc. As a result of the economic downturn,we have seen pricing declines brought on by increased charge-offs, reducedcollections, and consolidation among buyers due to reduced access to capitaland the more challenging collection environment. While the purchased accountsreceivable business remains competitive, particularly for recent credit cardcharge-offs, buyers have become more cautious and selective, and are demandinga higher return on their investments. We believe the primary competitivedrivers in this business are access to capital, access to a solid servicingplatform, and the ability to purchase portfolios at reasonable prices that areconsistent with appropriate risk premiums given the uncertain economicenvironment.

 

**Regulation**

 

**AccountsReceivable Management**

 

The ARM industry in the UnitedStates is regulated both at the federal and state level. The Federal Fair DebtCollection Practices Act, referred to as the FDCPA, regulates any person whoregularly collects or attempts to collect, directly or indirectly, consumerdebts owed or asserted to be owed to another person. The FDCPA establishes specificguidelines and procedures that debt collectors must follow in communicatingwith consumer debtors, including the time, place and manner of suchcommunications. Further, it prohibits harassment or abuse by debt collectors, 

 

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includingthe threat of violence or criminal prosecution, obscene language or repeatedtelephone calls made with the intent to abuse or harass. The FDCPA also placesrestrictions on communications with individuals other than consumer debtors inconnection with the collection of any consumer debt and sets forth specificprocedures to be followed when communicating with such third parties for purposesof obtaining location information about the consumer. Additionally, the FDCPAcontains various notice and disclosure requirements and prohibits unfair ormisleading representations by debt collectors. We are also subject to the FairCredit Reporting Act, which regulates the consumer credit reporting industryand which may impose liability on us to the extent that the adverse creditinformation reported on a consumer to a credit bureau is false or inaccurate.The Federal Trade Commission, referred to as the FTC, has the authority toinvestigate consumer complaints against debt collection companies and torecommend enforcement actions and seek monetary penalties. The ARM business isalso subject to state regulation. Some states require that we be licensed as adebt collection company. We believe that we currently hold applicable statelicenses from all states where required.

 

We provide services to healthcareclients that are considered “covered entities” under the Health InsurancePortability and Accountability Act of 1996, referred to as HIPAA. As coveredentities, our clients must comply with the standards for privacy, transactionand code sets, and data security. Under HIPAA, we are considered a “businessassociate,” which requires that we protect the security and privacy of “protectedhealth information” provided to us by our clients for the collection ofpayments for healthcare services. We believe that we operate in compliance withall applicable standards under HIPAA in all material respects.

 

The collection ofaccounts receivable by collection agencies in Canada is regulated at theprovincial and territorial level in substantially the same fashion as isaccomplished by federal and state laws in the United States. The manner inwhich we conduct the business of collecting accounts is subject, in allprovinces and territories, to established rules of common law or civil lawand statute. Such laws establish rules and procedures governing thetracing, contacting and dealing with debtors in relation to the collection ofoutstanding accounts. These rules and procedures prohibit debt collectorsfrom engaging in intimidating, misleading and fraudulent behavior whenattempting to recover outstanding debts. In Canada, our collection operationsare subject to licensing requirements and periodic audits by governmentagencies and other regulatory bodies. Generally, such licenses are subject toannual renewal. We believe that we hold all necessary licenses in thoseprovinces and territories that require them.

 

In Australia, debtcollection and debt purchasing activities are regulated by legislation andregulation at a state and federal level, with licenses required forcorporations and individuals with varying effect at a state Level. TheTrade Practices Act, The Privacy Act and the Anti Money Laundering legislationare the primary federal laws, and the Commercial Agents legislation is thestate level legislation. NCO’s Australian operations are licensed across allrequired jurisdictions. We believe that we hold all necessary licenses in thosejurisdictions that require them.

 

In addition, theARM industry is regulated in the United Kingdom and Europe, including licensingrequirements. We believe we hold all necessary licenses required in the UnitedKingdom and Europe. If we expand our international operations, we may becomesubject to additional government control and regulation in other countries,which may be more onerous than those in the United States.

 

Several of theindustries served by us are also subject to varying degrees of governmentregulation. Although compliance with these regulations is generally theresponsibility of our clients, 

 

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we could be subject tovarious enforcement or private actions for our failure or the failure of ourclients to comply with such regulations.

 

**CustomerRelationship Management**

 

In the UnitedStates, there are two major federal laws that specifically addresstelemarketing, the Telephone Consumer Protection Act, referred to as TCPA,which authorized the Federal Communications Commission, referred to as the FCC,to adopt rules implementing the TCPA, and the Telemarketing and ConsumerFraud and Abuse Prevention Act, referred to as the Fraud Prevention Act, whichauthorized the FTC, to adopt the Telemarketing Sales Rule, referred to as theTSR. Over the past few years, the TSR has been amended to include several newrestrictions on telemarketing activities. In addition, the states have variousregulatory restrictions and requirements for telemarketing companies.

 

The TCPA placesrestrictions on unsolicited automated telephone calls to residential telephonesubscribers by means of automatic telephone dialing systems, prerecorded orartificial voice messages and telephone fax machines. In addition, theregulations require CRM firms to develop a “do not call” list and to traintheir CRM personnel to comply with these restrictions. The TCPA creates a rightof action for both consumers and state attorneys general. A court may awarddamages or impose penalties of $500 per violation, which may be trebled forwillful or knowing violations. Currently, we train our service representativesto comply with the regulations of the TCPA. On March 11, 2003, theDo-Not-Call Implementation Act, referred to as the Do-Not-Call Act, was signedinto law. The Do-Not-Call Act required the FCC to issue final rules underthe TCPA to maximize the consistency of the TCPA with the FTC’s December 18,2002 amendments to the TSR, as discussed below. Accordingly, on July 3,2003, the FCC issued rules regarding the national do-not-call registry,call abandonment and caller ID requirements.

 

The FTC regulatesboth general sales practices and telemarketing specifically and has broadauthority to prohibit a variety of advertising or marketing practices that mayconstitute “unfair or deceptive acts or practices.” Pursuant to its generalenforcement powers, the FTC can obtain a variety of types of equitable relief,including injunctions, refunds, disgorgement, the posting of bonds and barsfrom continuing to do business for a violation of the acts and regulations itenforces.

 

The FTC alsoadministers the Fraud Prevention Act under which the FTC has issued the TSRprohibiting a variety of deceptive, unfair or abusive practices in directtelephone sales. Generally, these rules prohibit misrepresentations of thecost, quantity, terms, restrictions, performance or characteristics of productsor services offered by telephone solicitation or of refund, cancellation orexchange policies. The rules also regulate the use of prize promotions indirect telephone sales to prevent deception and require that a telemarketeridentify promptly and clearly the seller on whose behalf the CRM representativeis calling, the purpose of the call, the nature of the goods or servicesoffered and that no purchase or payment is necessary to win a prize. Theregulations also require that providers of services maintain records on variousaspects of their businesses.

 

On December 18,2002, the FTC amended the TSR. The major change was the creation of acentralized national “do not call” registry. Federal enforcement of theNational Do Not Call Registry began on October 1, 2003. A consumer whoreceives a telemarketing call despite being on the registry can file acomplaint with the FTC, either online or by calling a toll free number.Violators could be fined up to $11,000 per incident. In addition, the amendedTSR restricts call abandonment (with certain safe harbors) and unauthorizedbilling. Further, as of January 29, 2004, 

 

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the amended TSR requirestelemarketers to transmit their telephone numbers and, if possible, their namesto consumers’ “caller id” services.

 

At the statelevel, most states have enacted consumer protection statutes prohibiting unfairor deceptive acts or practices as they relate to telemarketing sales. Forexample, telephone sales in certain states are not final until a writtencontract is delivered to and signed by the buyer, and such a contract often maybe canceled within three business days. At least one state also prohibitsparties conducting direct telephone sales from requesting credit card numbersin certain situations, and several other states require certain providers ofsuch services to register annually, post bonds or submit sales scripts to the state’sattorney general. Under these general enabling statutes, depending on thewillfulness and severity of the violation, penalties can include imprisonment,fines and a range of equitable remedies such as consumer redress or the postingof bonds before continuing in business.

 

Additionally, somestates have enacted laws and others are considering enacting laws targeted atdirect telephone sales practices. Some examples include laws regulatingelectronic monitoring of telephone calls and laws prohibiting any interferenceby direct telephone sales with “caller id” devices. Most of these statutesallow a private right of action for the recovery of damages or provide forenforcement by state agencies permitting the recovery of significant civil orcriminal penalties, costs and attorneys’ fees. There can be no assurance thatany such laws, if enacted, will not adversely affect or limit our current orfuture operations.

 

To date, 14 stateshave established statewide “do not call” lists. Twenty-eight states have optedto use the FTC’s Do Not Call list as the official state list.

 

The industries weserve are also subject to government regulation, and, from time to time, billsare introduced in Congress, which, if enacted, could affect our operations. We,and our employees who sell insurance products, are required to be licensed byvarious state and provincial insurance commissions for the particular type ofinsurance product to be sold and are required to participate in regularcontinuing education programs.

 

Telecommunicationsis another industry we serve that is subject to government regulation. Forexample, “slamming” is the illegal practice of changing a consumer’s telephoneservice without permission. The FCC has promulgated regulations regardingslamming rules that apply solely to the telecommunications carrier and notthe telemarketer or the independent party verifying the service change.However, some state slamming rules may extend liability for violations toagents and other representatives of telecommunications carriers, such astelemarketers.

 

Ourrepresentatives undergo an extensive training program, part of which isdesigned to educate them about applicable laws and regulations and to try toensure their compliance with such laws and regulations. Also, we program ourcall management system to avoid initiating telephone calls during restrictedhours or to individuals maintained on our “do not call” list.

 

In Canada, theCanadian Radio-Television and Telecommunications Commission, referred to asCRTC, enforces rules regarding unsolicited communications using automaticdialing and announcing devices, live voice and fax. Companies that violate anyof the restrictions on unsolicited calls may have their telephone serviceterminated after two business days’ notice from the telephone company.Effective October 1, 2004, the CRTC was to require telemarketers toprovide consumers with a unique registration number confirming a consumer’s donot call request; however, on September 28, 2005, the CRTC granted therequest of the Canadian Marketing 

 

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Association, referred toas CMA, for a stay of decision, pending its consideration of the CMA’s appeal.

 

In November 2005,a bill was announced to amend the Telecommunications Act, which would allow thecreation of a Canadian National Do Not Call list where consumers could registeronce to stop all unwanted telemarketing calls. The CRTC announced on January 2,2008 that the list is expected to be launched by September 30, 2008, andthat Bell Canada will be responsible for registering numbers, providingtelemarketers with up-to-date versions of the list, and receiving consumercomplaints about telemarketing calls. The National Do Not Call List (NDNCL) didlaunch as planned in September 2008. A telemarketer shall not initiate atelemarketing communication on behalf of a client unless that client is aregistered subscriber of the NDNCL and the applicable fees have been paid.Although we do not initiate telemarketing calls on our own behalf, we haveregistered as a telemarketer with the NDNCL. Additionally, we ensure that ourclients have properly registered and paid for the NDNCL by requesting theclient’s registration number.

 

In 2001, thefederal government of Canada enacted the Personal Information Protection andElectronic Documents Act, referred to as the Federal Act. Effective January 1,2004, the Federal Act requires all commercial enterprises to obtain consent forthe collection, use, and disclosure of an individual’s personal information.Failure to comply with the Federal Act could result in significant fines andpenalties or possible damage awards for the tort of public humiliation. Inaddition to the foregoing sanctions, the Federal Act also contemplates that anyfinding of an improper use of personal information will be subject to publicdisclosure by the Privacy Commissioner. The Federal Act permits any Province ofCanada to enact substantially similar legislation governing the subject matterof the Federal Act, in which case the legislation of the Province will overridethe provisions of the Federal Act. Our Canadian operations are locatedprimarily in the Provinces of Ontario, British Columbia and New Brunswick.British Columbia has enacted legislation, referred to as the B.C. Act,governing the subject matter of the Federal Act. The federal government ofCanada has not yet declared the B.C. Act substantially similar to the Federal Act.Until such time as the federal government of Canada makes such declaration,both the B.C. Act and the Federal Act will apply concurrently to our operationsin British Columbia. Though neither has yet enacted legislation that issubstantially similar to the Federal Act, both Ontario and New Brunswick haveindicated that they may enact legislation governing the subject matter of theFederal Act. Failure to comply with the Federal Act, the B.C. Act, as well as,any such future legislation enacted by Ontario, New Brunswick or any otherprovinces in which we operate, may have an adverse affect on, or limit ourcurrent or future, operations.

 

The CompetitionAct contains a number of provisions that regulate the conduct of telemarketersin Canada, in particular the manner in which outbound calls are to beconducted. Failure to comply with such legislation could adversely affect ourbusiness.

 

We devotesignificant and continuous efforts, through training of personnel andmonitoring of compliance, to ensure that we comply with all applicable foreign,federal and state regulatory requirements. We believe that we are in materialcompliance with all such regulatory requirements.

 

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**Segmentand Geographical Financial Information**

 

See Note 20 in our Notes to Consolidated Financial Statements for theyear ended December 31, 2008 for disclosure of financial informationregarding our segments. The following table presents revenues and total assets,net of any intercompany balances, from the U.S., Canada, Panama, the U.K. andall other foreign countries in total (amounts in millions):

 

| ** **    | ** ** | **For the Years Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:     |       |                                                          |       |   |   |   |   |
| U.S.          |       | $                                                             | 1,369.7    |   | $ | 1,151.8 |   | $ | 1,118.5 |   |
| Canada        |       | 46.8                                                          |       | 57.2 |   | 48.7 |   |
| Panama        |       | 28.7                                                          |       | 27.1 |   | 1.4 |   |
| U.K.          |       | 25.7                                                          |       | 24.1 |   | 25.5 |   |
| Other         |       | 42.2                                                          |       | 25.2 |   | 2.1 |   |
|          |       |                                                          |       |   |   |   |   |
| Total assets: |       |                                                          |       |   |   |   |   |
| U.S.          |       | $                                                             | 1,411.5    |   | $ | 1,441.0 |   | $ | 1,531.1 |   |
| Canada        |       | 121.4                                                         |       | 118.2 |   | 81.7 |   |
| Panama        |       | 55.9                                                          |       | 56.8 |   | 38.7 |   |
| U.K.          |       | 18.7                                                          |       | 15.5 |   | 23.8 |   |
| Other         |       | 94.1                                                          |       | 46.5 |   | 17.3 |   |

 

**Item 1A.         RiskFactors**

 

You shouldcarefully consider the following risk factors. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties that we are unaware of, or that we currently deem immaterial,also may become important factors that affect us.

 

**Risks Related to the CurrentEnvironment and Recent Developments**

** **

**Recentinstability in the financial markets and global economy may affect our accessto capital, our ability to purchase accounts, and the success of our collectionefforts which could have a material adverse effect on our results of operationsand revenue.**

 

The stressexperienced by global capital markets that began in the second half of 2007continued and substantially increased during the second half of 2008. Recently,concerns over inflation, energy costs, geopolitical issues, the availabilityand cost of credit, the U.S. mortgage market and a declining real estate marketin the U.S. have contributed to increased volatility and diminishedexpectations for the economy and the markets going forward. These factors,combined with volatile oil prices, declining business and consumer confidenceand increased unemployment, have precipitated a recession. This economicdownturn has adversely affected the ability and willingness of consumers to paytheir debts and resulted in a weaker collection environment in 2008. Theeconomic downturn may continue and unemployment may continue to rise. Theability and willingness of consumers to pay their debts could continue to beadversely affected, which could have a material adverse effect on our resultsof operations, collections and revenue.

 

Furtherdeterioration in economic conditions in the United States may also lead tohigher rates of personal bankruptcy filings. Defaulted consumer loans that weservice or purchase are generally unsecured, and we may be unable to collectthese loans in the case of personal bankruptcy of a consumer. Increases inbankruptcy filings could have a material adverse effect on our results ofoperations, collections and revenue

 

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Continued orfurther credit market dislocations or sustained market downturns may alsoreduce the ability of lenders to originate new credit, limiting our ability toservice or purchase defaulted consumer loans in the future. We are currently incompliance with all of our debt covenants, but the future impact on ouroperations and financial projections from the challenging economic and businessenvironment may impact our ability to meet our debt covenants in the future.Further, increased financial pressure on the distressed consumer may result inadditional regulatory restrictions on our operations and increased litigationfiled against us. We are unable to predict the likely duration or severity ofthe current disruption in financial markets and adverse economic conditions andthe effects they may have on our business, financial condition and results ofoperations.

 

**Adversecapital and credit market conditions may significantly affect our ability tomeet liquidity needs and access capital.**

 

The current globalfinancial and credit crisis exposes us to a variety of risks. The capital andcredit markets have been experiencing extreme volatility and disruption formore than twelve months. Disruptions in the credit markets make it harder andmore expensive to obtain funding.  Insome cases, the markets have exerted downward pressure on availability ofliquidity and credit capacity for certain issuers.

 

We need liquidityto pay our operating expenses and debt service obligations. Without sufficientliquidity, we could be forced to limit our investment in growth opportunitiesor curtail operations. The principal sources of our liquidity are cash flowsfrom operations, including collections on purchased accounts receivable, bankborrowings, nonrecourse borrowings, and equity and debt offerings. As a resultof the global financial crisis, there is a risk that one or more lenders in oursenior credit facility syndicate could be unable to meet contractuallyobligated borrowing requests in the future. In the event current resources donot satisfy our needs, we may have to seek additional financing. Theavailability of additional financing will depend on a variety of factors suchas market conditions and the general availability of credit. If current levelsof market disruption and volatility continue or worsen, we may not be able tosuccessfully obtain additional financing on favorable terms, or at all.

 

**Therecan be no assurance that actions of the U.S. Government, Federal Reserve andother governmental and regulatory bodies for the purpose of stabilizing thefinancial markets will achieve the intended effect.**

 

In response to thefinancial crises affecting the banking system and financial markets and goingconcern threats to investment banks and other financial institutions, theFederal Government, Federal Reserve and other governmental and regulatorybodies have taken action and are considering taking further actions to addressthe financial crisis. There can be no assurance as to what impact such actionswill have on the financial markets, including the extreme levels of volatilitycurrently being experienced.

 

**Derivativetransactions may expose us to unexpected risk and potential losses.**

 

We are party tocertain derivative transactions, such as interest rate swap contracts andforeign exchange contracts, with financial institutions to hedge againstcertain financial risks. Changes in the fair value of these derivative financialinstruments that are not cash flow hedges are reported in income, andaccordingly could materially affect our reported income in any period.Moreover, in the light of current economic uncertainty and potential forfinancial institution failures, we may be exposed to the risk that ourcounterparty in a derivative transaction may be unable to perform its 

 

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obligations as a resultof being placed in receivership or otherwise. In the event that a counterpartyto a material derivative transaction is unable to perform its obligationsthereunder, we may experience material losses that could materially adversely affectour results of operations and financial condition.

 

### **Risks Related toour Business**

###  

**Ourbusiness is dependent on our ability to grow internally.**

 

Our business isdependent on our ability to grow internally, which is dependent upon:

 

·our ability to retain existing clients and expand our existing clientrelationships; and

·our ability to attract new clients.

 

Our ability toretain existing clients and expand those relationships is subject to a numberof risks, including the risk that:

 

·      we fail to maintain the quality ofservices we provide to our clients;

·      we fail to maintain the level of attentionexpected by our clients;

·      we fail to successfully leverage ourexisting client relationships to sell additional services; and

·      we fail to provide competitively pricedservices.

 

Our ability toattract new clients is subject to a number of risks, including:

 

·      the market acceptance of our serviceofferings;

·      the quality and effectiveness of our salesforce; and

·      the competitive factors within the BPOindustry.

 

If our efforts toretain and expand our client relationships and to attract new clients do notprove effective, it could have a materially adverse effect on our business,results of operations and financial condition.

 

**Wecompete with a large number of providers in the ARM and CRM industries, andother purchasers of consumer debt. This competition could have a materiallyadverse effect on our future financial results.**

 

We compete with alarge number of companies in the industries in which we provide services. Inthe ARM industry, we compete with other sizable corporations in the U.S. andabroad such as Alliance One, GC Services LP and IntelliRisk ManagementCorporation, as well as many regional and local firms. In the CRM industry, wecompete with large customer care outsourcing providers such as ConvergysCorporation, ICT Group, TeleTech Holdings, Inc., and West Corporation. Wemay lose business to competitors that offer more diversified services, havegreater financial and other resources and/or operate in broader geographicareas than we do. We may also lose business to regional or local firms who areable to use their proximity to or contacts at local clients as a marketingadvantage. In addition, many companies perform the BPO services offered by usin-house. Many larger clients retain multiple BPO providers, which exposes usto continuous competition in order to remain a preferred provider. Because ofthis competition, in the future we may have to reduce our fees to remain competitiveand this competition could have a materially adverse effect on our futurefinancial results.

 

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Our PortfolioManagement business competes with other purchasers of delinquent consumeraccounts receivable, such as Asset Acceptance Capital Corp., Encore CapitalGroup, Inc. and Portfolio Recovery Associates, Inc. The purchasedaccounts receivable business had become increasingly competitive over the pastfew years, with several new companies entering the market. Historically ourindustry has attracted a large amount of investment capital. However, therecent downturn in the economy has impacted available capital andcollectability, resulting in lower pricing and less competition for portfolios.Our competitors may have greater financial resources or access to credit topurchase portfolios than we do, and may be able to outbid us on availableportfolios. In the future we may have to pay more for our portfolios, whichcould have an adverse impact on our financial results.

 

**Manyof our clients are concentrated in the financial services, telecommunications,and healthcare sectors. If any of these sectors performs poorly or if there areany adverse trends in these sectors it could materially adversely affect us.**

 

For the year endedDecember 31, 2008, we derived approximately 31.7 percent of our revenuefrom clients in the financial services sector, approximately 21.9 percent ofour revenue from clients in the telecommunications industry, and approximately12.4 percent of our revenue from clients in the healthcare sector, in each caseexcluding purchased accounts receivable. If any of these sectors performspoorly, clients in these sectors may do less business with us, or they mayelect to perform the services provided by us in-house. If there are any trendsin any of these sectors to reduce or eliminate the use of third-party BPOservice providers, it could harm our business and results of operations.

 

**We have international operations and utilize foreign sources of labor, and various factors relating to our international operations, including fluctuations in currency exchange rates, could adversely affect our results of operations.**

 

Approximately 6.1% of our 2008 revenues were derived from clients in Canada, the United Kingdom and Australia. Political or economic instability in Canada, the United Kingdom or Australia could have an adverse impact on our results of operations due to diminished revenues in these countries. Our future revenue, costs of operations and profitability could also be affected by a number of other factors related to our international operations, including changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements, and local tax or foreign exchange issues. Unanticipated currency fluctuations in the Canadian Dollar, British Pound, Euro or the Australian Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies into U.S. dollars when we consolidate our financial results.

 

We provide ARM and CRM services to our U.S. clients utilizing foreign sources of labor through call centers in Canada, India, the Philippines, Barbados, Antigua, Australia, Panama and Mexico. Any political or economic instability in these countries could result in our having to replace or reduce these labor sources, which may increase our labor costs and have an adverse impact on our results of operations. A decrease in the value of the U.S. dollar in relation to the currencies of the countries in which we operate could increase our cost of doing business in those countries. In addition, we expect to expand our operations into other countries and, accordingly, will face similar risks with respect to the costs of doing business in such countries including as a result of any decreases in the value of the U.S. dollar in relation to the currencies of such countries. There is no guarantee that we will be able to successfully hedge our foreign currency exposure in the future.

 

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We seek growth opportunities for our business in parts of the world where we have had little or no prior experience. International expansion into new markets with different cultures and laws poses additional risks and costs, including the risk that we will not be able to obtain the required permits, comply with local laws and regulations, hire, train and maintain a workforce, and obtain and maintain physical facilities in a culture and under laws that we are not familiar with. In addition, we may have to customize certain of our collection techniques to work with a different consumer base in a different regulatory environment. Also, we may have to revise certain of our analytical portfolio techniques as we apply them in different countries.

 

**Weare dependent on our employees and a higher turnover rate would have a materialadverse effect on us.**

 

We are dependenton our ability to attract, hire and retain qualified employees. The BPOindustry, by its nature, is labor intensive and experiences a high employeeturnover rate. Many of our employees receive modest hourly wages and some ofthese employees are employed on a part-time basis. A higher turnover rate amongour employees would increase our recruiting and training costs and couldmaterially adversely impact the quality of services we provide to our clients.If we were unable to recruit and retain a sufficient number of employees, wewould be forced to limit our growth or possibly curtail our operations. Growthin our business will require us to recruit and train qualified personnel at anaccelerated rate from time to time. We cannot assure that we will be able tocontinue to hire, train and retain a sufficient number of qualified employeesto meet the needs of our business or to support our growth. If we are unable todo so, our results of operations could be harmed. Any increase in hourly wages,costs of employee benefits or employment taxes could also have a materiallyadverse affect on our results of operations.

 

**Theemployees at one of our offices voted to join a labor union. Our otheremployees could become unionized in the future, which could increase our costsand result in a loss of customers.**

 

In February 2006,the employees at our call center in Surrey, British Columbia, Canada voted infavor of joining the B.C. Government and Services Employees’ Union, and acollective agreement was ratified in the first quarter of 2007. We arecurrently not aware of any other union organizing efforts at any of our otherfacilities. Proposed legislation in the United States called the Employee FreeChoice Act could make it easier for unions to organize based on card checkauthorization rather than by secret ballot election and could give third-partyarbitrators the ability to impose terms of a collective bargaining agreementupon us and a labor union if we and the union did not agree to the terms of acollective bargaining agreement. If our other employees are successful inorganizing a labor union at any of our locations, it could further increaselabor costs, decrease operating efficiency and productivity in the future,result in office closures, and result in a loss of customers.

 

**Ifwe are not able to respond to technological changes in telecommunications andcomputer systems in a timely manner, we may not be able to remain competitive.**

 

Our successdepends in large part on our sophisticated telecommunications and computersystems. We use these systems to identify and contact large numbers of debtorsand record the results of our collection efforts, as well as to providecustomer service to our clients’ customers. If we are not able to respond totechnological changes in telecommunications and computer systems in a timelymanner, we may not be able to remain competitive. We have made a significantinvestment in technology to remain competitive and we anticipate that it willbe necessary to continue to do so in the future. Telecommunications andcomputer technologies are changing 

 

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rapidly and arecharacterized by short product life cycles, so we must anticipate technologicaldevelopments. If we are not successful in anticipating, managing, or adoptingtechnological changes on a timely basis or if we do not have the capitalresources available to invest in new technologies, our business could bematerially adversely affected.

 

**Weare highly dependent on our telecommunications and computer systems.**

 

As noted above,our business is highly dependent on our telecommunications and computersystems. These systems could be interrupted by terrorist acts, naturaldisasters, power losses, computer viruses, or similar events. Our business isalso materially dependent on services provided by various local and longdistance telephone companies. If our equipment or systems cease to work orbecome unavailable, or if there is any significant interruption in telephoneservices, we may be prevented from providing services and collecting onaccounts receivable portfolios we have purchased. Because we generallyrecognize revenue and generate operating cash flow primarily through ARMcollections and providing CRM services, any failure or interruption of servicesand collections would mean that we would continue to incur payroll and otherexpenses without any corresponding income.

 

**Anincrease in communication rates or a significant interruption in communicationservice could harm our business.**

 

Our ability to offerservices at competitive rates is highly dependent upon the cost ofcommunication services provided by various local and long distance telephonecompanies. Any change in the telecommunications market that would affect ourability to obtain favorable rates on communication services could harm ourbusiness. Moreover, any significant interruption in communication service ordevelopments that could limit the ability of telephone companies to provide uswith increased capacity in the future could harm existing operations andprospects for future growth.

 

**Wemay seek to make strategic acquisitions of companies. Acquisitions involveadditional risks that may adversely affect us.**

 

From time to time,we may seek to make acquisitions of businesses that provide BPO services. We maybe unable to make acquisitions if suitable businesses that provide BPO servicesare not available at favorable prices due to increased competition for thesebusinesses.

 

We may have toborrow money, incur liabilities, or sell or issue stock to pay for futureacquisitions and we may not be able to do so on terms favorable to us, or atall. Additional borrowings and liabilities may have a materially adverse effecton our liquidity and capital resources. If we issue stock for all or a portionof the purchase price for future acquisitions, our stockholders’ ownershipinterest may be diluted. Our common stock is not publicly traded and potentialsellers may be unwilling to accept equity in a privately held company aspayment for the sale of their business. If potential sellers are not willing toaccept our common stock as payment for the sale of their business, we may berequired to use more of our cash resources, if available, in order to continueour acquisition strategy.

 

Completingacquisitions involves a number of risks, including diverting management’sattention from our daily operations, other additional management, operationaland financial resources, system conversions and the inability to maintain keypre-acquisition relationships with customers, suppliers and employees. We mightnot be able to successfully integrate future 

 

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acquisitions into ourbusiness or operate the acquired businesses profitably, and we may be subjectto unanticipated problems and liabilities of acquired companies.

 

**Oursuccess depends on our senior management team and if we are not able to retainthem, it could have a materially adverse effect on us.**

 

We are highlydependent upon the continued services and experience of our senior managementteam, including Michael J. Barrist, our Chairman, President and Chief ExecutiveOfficer. We depend on the services of Mr. Barrist and the other members ofour senior management team to, among other things, continue the development andimplementation of our growth strategies, and maintain and develop our clientrelationships.

 

**Goodwilland other intangible assets represented 57.8 percent of our total assets at December 31,2008. If the goodwill or the other intangible assets, primarily our customerrelationships and trade name, are deemed to be impaired, we may need to take acharge to earnings to write-down the goodwill or other intangibles to its fairvalue.**

 

Our balance sheetincludes goodwill, which represents the excess of the purchase price over thefair market value of the net assets of acquired businesses based on theirrespective fair values at the date of acquisition. Trade name represents thefair value of the NCO name and is an indefinite-lived intangible asset. Otherintangibles are composed of customer relationships, which represent theinformation and regular contact we have with our clients and non-competeagreements.

 

Goodwill is testedat least annually for impairment. The test for impairment uses a fair valuebased approach, whereby if the implied fair value of a reporting unit’sgoodwill is less than its carrying amount, goodwill would be consideredimpaired. The trade name intangible asset is also reviewed for impairment on anannual basis.

 

Late in 2008, ourARM and Portfolio Management reporting units experienced a significantreduction in the collectability of both customer-placed and purchased accountsreceivable resulting from deteriorating economic conditions. Due to theexpected impact of the economic environment, we reduced our 2009 budgetedexpectations for each of our reporting units. As a result, our 2008 annualimpairment test for goodwill and trade name indicated that the carrying valuesof all of our reporting units exceeded their fair values, and we recordedgoodwill impairment charges of $275.5 million and trade name impairment chargesof $14.0 million. If our goodwill or trade name are deemed to be furtherimpaired, we will need to take an additional charge to earnings in the futureto write-down the asset to its fair value.

 

We makesignificant assumptions to estimate the future revenue and cash flows used todetermine the fair value of our reporting units. These assumptions includefuture growth rates, profitability, discount factors, market comparables,future tax rates, and other factors. Variations in any of these assumptionscould result in materially different calculations of impairment amounts. If theexpected revenue and cash flows are not realized, additional impairment lossesmay be recorded in the future.

 

Our otherintangibles, consisting of customer relationships and non-compete agreements,are reviewed for impairment whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. For example, the loss of alarger client could require a review of the customer relationship forimpairment. We made significant assumptions to estimate the future cash flowsused to determine the fair value of the customer relationship. If we lost asignificant 

 

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customer relationship,the future cash flows expected to be generated by the customer relationshipwould be less than the carrying amount, and an impairment loss may be recorded.

 

As of December 31,2008, our balance sheet included goodwill, trade name and other intangiblesthat represented 33.2 percent, 5.0 percent and 19.6 percent of total assets,respectively, and 216.3 percent, 32.7 percent and 128.0 percent of stockholders’equity, respectively.

 

**Securityand privacy breaches of the systems we use to protect personal data couldadversely affect our business, results of operations and financial condition.**

 

Our databasescontain personal data of our clients’ customers, including credit card andhealthcare information. Any security or privacy breach of these databases couldexpose us to liability, increase our expenses relating to the resolution ofthese breaches and deter our clients from selecting our services. Our datasecurity procedures may not effectively counter evolving security risks,address the security and privacy concerns of existing or potential clients orbe compliant with federal, state, and local laws and regulations in allrespects. Any failures in our security and privacy measures could adverselyaffect our business, financial condition and results of operations.

 

**Ifwe fail to maintain an effective system of internal control over financialreporting and disclosure controls and procedures, we may be unable toaccurately report our financial results and comply with the reportingrequirements under the Securities Exchange Act of 1934.  As a result, investors may lose confidence inour financial reporting and disclosure required under the Securities ExchangeAct of 1934, which could adversely affect our business and could subject us toregulatory scrutiny.**

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we arerequired to include in our Annual Reports on Form 10-K, our management’sreport on internal control over financial reporting and, beginning in fiscal2009, our registered public accounting firm’s attestation report on ourmanagement’s assessment of our internal control over financial reporting.  While we have reported no “materialweaknesses” in the Form 10-K for the fiscal year ended December 31,2008, we cannot guarantee that we will not have any “significant deficiencies”or “material weaknesses” reported by our independent registered publicaccounting firm in the future. Compliance with the requirements of Section 404is expensive and time-consuming.  If inthe future we fail to complete this evaluation in a timely manner, or if ourindependent registered public accounting firm cannot timely attest to management’sevaluation, we could be subject to regulatory scrutiny and a loss of publicconfidence in our internal control over financial reporting.  In addition, any failure to establish aneffective system of disclosure controls and procedures could cause our currentand potential investors and customers to lose confidence in our financialreporting and disclosure required under the Securities Exchange Act of 1934,which could adversely affect our business.

 

###### **Terrorist attacks,war and threats of attacks and war may adversely impact our results ofoperations, revenue and profitability.**

######  

Terrorist attacksin the United States and abroad, as well as war and threats of war or actualconflicts involving the United States or other countries in which we operate,may adversely impact our operations, including affecting our ability to collectour clients’ accounts receivable. More generally, any of these events couldcause consumer confidence and spending to decrease. They 

 

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could also result in anadverse effect on the economies of the United States and other countries inwhich we operate. Any of these occurrences could have a material adverse effecton our results of operations, collections and revenue.

 

### **Risks Related toour ARM Business**

###  

### We are subject to business-relatedrisks specific to the ARM business. Some of those risks are:

###  

**Mostof our ARM contracts do not require clients to place accounts with us, may beterminated on 30 or 60 days notice, and are on a contingent fee basis. Wecannot guarantee that existing clients will continue to use our services athistorical levels, if at all.**

 

Under the terms ofmost of our ARM contracts, clients are not required to give accounts to us forcollection and usually have the right to terminate our services on 30 or 60 daysnotice. Accordingly, we cannot guarantee that existing clients will continue touse our services at historical levels, if at all. In addition, most of thesecontracts provide that we are entitled to be paid only when we collectaccounts. Therefore, for these contracts, we can only recognize revenues uponthe collection of funds on behalf of clients.

 

**Ifwe fail to comply with government regulation of the collections industry, itcould result in the suspension or termination of our ability to conduct business.**

 

The collectionsindustry is regulated under various U.S. federal and state, Canadian, UnitedKingdom and Australian laws and regulations. Many states, as well as Canada,the United Kingdom and Australia, require that we be licensed as a debtcollection company. The Federal Trade Commission, referred to as the FTC, hasthe authority to investigate consumer complaints against debt collectioncompanies and to recommend enforcement actions and seek monetary penalties. Ifwe fail to comply with applicable laws and regulations, it could result infines as well as the suspension or termination of our ability to conductcollections, which would materially adversely affect us. State regulatoryauthorities have similar powers. If such matters resulted in furtherinvestigations and subsequent enforcement actions, we could be subject to finesas well as the suspension or termination of our ability to conduct collections,which would materially adversely affect our financial position and results ofoperations. In addition, new federal, state or foreign laws or regulations, orchanges in the ways these rules or laws are interpreted or enforced, couldlimit our activities in the future or significantly increase the cost ofregulatory compliance. If we expand our international operations, we may becomesubject to additional government controls and regulations in other countries,which may be stricter or more burdensome than those government controls andregulations to which we are currently subject.

 

### Several of the industries we serveare also subject to varying degrees of government regulation. Although ourclients are generally responsible for complying with these regulations, wecould be subject to various enforcement or private actions for our failure, orthe failure of our clients, to comply with these regulations.

###  

**RisksRelated to our CRM Business**

 

### We are subject to business-relatedrisks specific to the CRM business. Some of those risks are:

###  

**Consumerresistance to outbound services could harm the CRM services industry.**

 

As the CRM servicesindustry continues to grow, the effectiveness of CRM services as a direct 

 

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marketing tool maydecrease as a result of consumer saturation and increased consumer resistanceto customer acquisition activities, particularly direct sales andtelemarketing. This could result in a decrease in the demand for our CRMservices.

 

**TheCRM division relies on a few key clients for a significant portion of itsrevenues. The loss of any of these clients or their failure to pay us couldreduce revenues and adversely affect results of operations.**

 

The CRM division ischaracterized by substantial revenues from a few key clients. While noindividual CRM client represented more than 10 percent of our consolidatedrevenue, we are exposed to customer concentration within this division. Most ofthese clients are not contractually obligated to continue to use our servicesat historic levels or at all. If any of these clients were to significantlyreduce the amount of service, fail to pay, or terminate the relationshipaltogether, our CRM business could be harmed.

 

**Governmentregulation of the CRM industry and the industries we serve may increase ourcosts and restrict the operation and growth of our CRM business.**

 

The CRM services industryis subject to an increasing amount of regulation in the United States andCanada. In the United States, the FCC places restrictions on unsolicitedautomated telephone calls to residential telephone subscribers by means ofautomatic telephone dialing systems, prerecorded or artificial voice messagesand telephone fax machines, and requires CRM firms to develop a “do not call”list and to train their CRM personnel to comply with these restrictions. TheFTC regulates both general sales practices and telemarketing specifically andhas broad authority to prohibit a variety of advertising or marketing practicesthat may constitute “unfair or deceptive acts or practices.” Most of thestatutes and regulations in the United States allow a private right of actionfor the recovery of damages or provide for enforcement by the FTC, stateattorneys general or state agencies permitting the recovery of significantcivil or criminal penalties, costs and attorneys’ fees in the event thatregulations are violated. The Canadian Radio-Television and TelecommunicationsCommission enforces rules regarding unsolicited communications usingautomatic dialing and announcing devices, live voice and fax. We cannot assureyou that we will be in compliance with all applicable regulations at all times.We also cannot assure you that new laws, if enacted, will not adversely affector limit our current or future operations.

 

Several of the industrieswe serve, particularly the insurance, financial services and telecommunicationsindustries, are subject to government regulation. We could be subject to avariety of private actions or regulatory enforcement for our failure or thefailure of our clients to comply with these regulations. Our results ofoperations could be adversely impacted if the effect of government regulationof the industries we serve is to reduce the demand for our CRM services orexpose us to potential liability. We, and our employees who sell insuranceproducts, are required to be licensed by various state insurance commissions forthe particular type of insurance product sold and to participate in regularcontinuing education programs. Our participation in these insurance programsrequires us to comply with certain state regulations, changes in which couldmaterially increase our operating costs associated with complying with theseregulations.

 

### **Risks Related toour Purchased Accounts Receivable Business**

###  

We are subject to business-related risks specific tothe Purchased Accounts Receivable business. Some of those risks are:

 

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**Collections may not be sufficient to recover thecost of investments in purchased accounts receivable and support operations.**

 

We purchase past due accounts receivable generated primarily byconsumer credit transactions. These are obligations that the individualconsumer has failed to pay when due. The accounts receivable are purchased fromconsumer creditors such as banks, finance companies, retail merchants, hospitals,utilities, and other consumer-oriented companies. Substantially all of theaccounts receivable consist of account balances that the credit grantor hasmade numerous attempts to collect, has subsequently deemed uncollectible, andcharged off. After purchase, collections on accounts receivable could bereduced by consumer bankruptcy filings. The accounts receivable are purchasedat a significant discount, typically less than 10 percent of face value, and,although we estimate that the recoveries on the accounts receivable will be inexcess of the amount paid for the accounts receivable, actual recoveries on theaccounts receivable will vary and may be less than the amount expected, and mayeven be less than the purchase price paid for such accounts. In addition, thetiming or amounts to be collected on those accounts receivable cannot beassured. If cash flows from operations are less than anticipated as a result ofour inability to collect accounts receivable, we may have difficulty servicingour debt obligations and may not be able to purchase new accounts receivable,and our future growth and profitability will be materially adversely affected.

 

**We use estimates to report results.For the year ended December 31, 2008, we recorded an impairment charge of$98.9 million relating to our purchased receivables portfolio. If the amountand/or timing of collections on portfolios are materially different thanexpected, we may be required to record further impairment charges that couldhave a materially adverse effect on us.**

 

Our revenue is recognized based on estimates of future collections onportfolios of accounts receivable purchased. Although these estimates are basedon analytics, the actual amount collected on portfolios and the timing of thosecollections will differ from our estimates. If collections on portfolios areless than estimated, we may be required to record an allowance for impairmentof our purchased receivables portfolio, which could materially adversely affectour earnings, financial condition and creditworthiness. For the year ended December 31,2008, we recorded an impairment charge of $98.9 million relating to ourpurchased receivables portfolio. If we continue to experience adverse effectsof the challenging economic and business environment, including changes infinancial projections, we may have to recognize further impairment charges onour purchased receivables portfolio.

 

**We may be adversely affected bypossible shortages of available accounts receivable for purchase at favorableprices.**

 

The availability of portfolios of past due consumer accounts receivablefor purchase at favorable prices depends on a number of factors outside of ourcontrol, including the continuation of the current growth trend in consumerdebt and competitive factors affecting potential purchasers and sellers ofportfolios of accounts receivable. The growth in consumer debt may also beaffected by changes in credit grantors’ underwriting criteria and regulationsgoverning consumer lending. Any slowing of the consumer debt growth trend couldresult in less credit being extended by credit grantors. Consequently, fewerdelinquent accounts receivable could be available at prices that we findattractive. If competitors raise the prices they are willing to pay for portfoliosof accounts receivable above those we wish to pay, we may be unable to buy thetype and quantity of past due accounts receivable at prices consistent with ourhistoric return targets. In addition, we may 

 

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overpay forportfolios of delinquent accounts receivable, which may have a materiallyadverse effect on our results of operations.

 

**We may be unable to compete withother purchasers of past due accounts receivable, which may have an adverseeffect on our financial results.**

 

We face bidding competition in our acquisitions of portfolios of pastdue consumer accounts receivable. Some of our existing competitors andpotential new competitors may have greater financial and other resources thatallow them to offer higher prices for the accounts receivable portfolios. Newpurchasers of such portfolios entering the market also cause upward pricepressures. We may not have the resources or ability to compete successfullywith our existing and potential new competitors. To remain competitive, we mayhave to increase our bidding prices, which may have an adverse impact on ourfinancial results.

 

**Risks Related to our Structure**

 

**We are controlled by an investorgroup led by One Equity Partners, a private equity firm, and its affiliates,whose interests may not be aligned with those of our noteholders.**

 

Our equity investors control the election of our directors and thereby havethe power to control our affairs and policies, including the appointment ofmanagement, the issuance of additional stock, stock repurchase programs and thedeclaration and payment of dividends. In addition, our equity investors mustconsent to the entering into of mergers, sales of substantially all our assetsand certain other transactions.

 

Circumstances may occur in which the interests of our equity investorscould be in conflict with those of our noteholders. For example if we encounterfinancial difficulties or are unable to pay our debts as they mature, ourequity investors might pursue strategies that favor equity investors over ourdebt investors. One Equity Partners may also have an interest in pursuingacquisitions, divestitures, financing or other transactions that, in theirjudgment, could enhance their equity investments, even though such transactionmight involve risk to our noteholders. Additionally, One Equity Partners is notprohibited from making investments in any of our competitors.

 

**Risks Related to Our $165.0million of Floating Rate Senior Notes due 2013 (“Senior Notes”), Our $200.0million of 11.875 percent Senior Subordinated Notes due 2014 (“SeniorSubordinated Notes”) and Our Other Indebtedness**

 

**Our substantial leverage and significantdebt service obligations could adversely affect our financial condition and ourability to fulfill our obligations and operate our business.**

 

We are highly leveraged and have significant debt service obligations.Our financial performance could be affected by our substantial leverage. At December 31,2008, our total indebtedness was $1.1 billion, and we had $193,000 of borrowingcapacity under the revolving portion of our senior credit facility and $18.3million of letters of credit outstanding. We may also incur additionalindebtedness in the future.

 

This high level of indebtedness could have important negativeconsequences to us and our noteholders, including:

 

·                  we may havedifficulty satisfying our obligations with respect to our senior notes and oursenior subordinated notes, collectively referred to as the notes;

 

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·                  we may have difficulty obtaining financing inthe future for working capital, capital expenditures, acquisitions or otherpurposes;

·                  we will need to use all, or a substantialportion, of our available cash flow to pay interest and principal on our debt,which will reduce the amount of money available to finance our operations andother business activities;

·                  some of our debt, including our borrowingsunder our senior credit facilities, has variable rates of interest, whichexposes us to the risk of increased interest rates;

·                  our debt level increases our vulnerability togeneral economic downturns and adverse industry conditions;

·                  our debt level could limit our flexibility inplanning for, or reacting to, changes in our business and in our industry ingeneral;

·                  our substantial amount of debt and the amountwe must pay to service our debt obligations could place us at a competitivedisadvantage compared to our competitors that have less debt;

·                  our customers may react adversely to oursignificant debt level and seek or develop alternative suppliers;

·                  we may have insufficient funds, and our debtlevel may also restrict us from raising the funds necessary, to repurchase allof the notes tendered to us upon the occurrence of a change of control, whichwould constitute an event of default under the notes; and

·                  our failure to comply with the financial andother restrictive covenants in our debt instruments which, among other things,require us to maintain specified financial ratios and limit our ability toincur debt and sell assets, could result in an event of default that, if notcured or waived, could have a material adverse effect on our business orprospects.

 

Our high level of indebtedness requires that we use a substantialportion of our cash flow from operations to pay principal of, and interest on,our indebtedness, which will reduce the availability of cash to fund workingcapital requirements, capital expenditures or other general corporate orbusiness activities, including future acquisitions.

 

In addition, a substantial portion of our indebtedness bears interestat variable rates, including indebtedness under our senior notes and our seniorcredit facility. If market interest rates increase, debt service on ourvariable-rate debt will rise, which would adversely affect our cash flow. Althoughour senior credit facility requires us to employ hedging strategies such thatnot less than 50 percent of the aggregate principal amount of the term loancarries a fixed rate of interest for a period of three years followingconsummation of the Transaction, any hedging arrangement in place may not offercomplete protection from this risk. Additionally, the remaining portion of theterm loan and the revolving portion of the senior credit facility, as well asour other floating rate debt may not be hedged and, accordingly, the portionthat is not hedged will be subject to changes in interest rates.

 

**We may be unable to generatesufficient cash to service all of our indebtedness, including the notes, andmeet our other ongoing liquidity needs and may be forced to take other actionsto satisfy our obligations under our indebtedness, which may be unsuccessful.**

 

Our ability to make scheduled payments or to refinance our debtobligations, including the notes, and to fund our planned capital expendituresand other ongoing liquidity needs, depends on our financial and operatingperformance, which is subject to prevailing economic and competitive conditionsand to certain financial, business and other factors beyond our control. Ourbusiness may not generate sufficient cash flow from operations or futureborrowings may not be available 

 

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to us under oursenior credit facility or otherwise in an amount sufficient to permit us to paythe principal, premium, if any, and interest on our indebtedness or to fund ourother liquidity needs. We may need to refinance all or a portion of our debt onor before maturity. We may be unable to refinance any of our debt oncommercially reasonable terms.

 

If our cash flows and capital resources are insufficient to fund ourdebt service obligations, we may be forced to reduce or delay capitalexpenditures, seek additional capital or seek to restructure or refinance ourindebtedness, including the notes. These alternative measures may beunsuccessful and may not permit us to meet our scheduled debt serviceobligations. In the absence of such operating results and resources, we couldface substantial liquidity problems and might be required to sell materialassets or operations to attempt to meet our debt service and other obligations.Our senior credit facility and the indentures governing the notes restrict ourability to use the proceeds from certain asset sales. We may be unable toconsummate those asset sales to raise capital or sell assets at prices that webelieve are fair and proceeds that we do receive may be inadequate to meet anydebt service obligations then due.

 

**Despite our current leverage, we andour subsidiaries may still be able to incur substantially more debt. This couldfurther exacerbate the risks that we and our subsidiaries face.**

 

We and our subsidiaries may be able to incur substantial additionalindebtedness in the future. The terms of the indentures do not fully prohibitus or our subsidiaries from doing so. The revolving credit portion of oursenior credit facility provides commitments of up to $100.0 million, $193,000of which was available for future borrowings, subject to certain conditions, asof December 31, 2008. All of those borrowings are secured, and as aresult, are effectively senior to the notes and the guarantees of the notes byour subsidiary guarantors. If we incur any additional indebtedness that ranksequally with the notes, the holders of that debt will be entitled to shareratably with the holders of the notes in any proceeds distributed in connectionwith any insolvency, liquidation, reorganization, dissolution or otherwinding-up of us. This may have the effect of reducing the amount of proceedspaid to our noteholders. If new debt is added to our current debt levels, therelated risks that we and our subsidiaries now face could intensify.

 

**Our senior credit facility contains,and the indentures governing the notes contain, a number of restrictivecovenants which will limit our ability to finance future operations or capitalneeds or engage in other business activities that may be in our interest.**

 

Our senior credit facility and the indentures governing the notesimpose, and the terms of any future indebtedness may impose, operating andother restrictions on us and our subsidiaries. Such restrictions affect or willaffect, and in many respects limit or prohibit, among other things, our abilityand the ability of our restricted subsidiaries to:

 

·                  incur additional indebtedness;

·                  create liens;

·                  pay dividends and make other distributions inrespect of our capital stock;

·                  redeem our capital stock;

·                  purchase accounts receivable;

·                  make certain investments or certain otherrestricted payments;

·                  sell certain kinds of assets;

·                  enter into certain types of transactions withaffiliates; and

·                  effect mergers or consolidations.

 

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In addition, our senior credit facility includes other more restrictivecovenants. Our senior credit facility also requires us to achieve certainfinancial and operating results and maintain compliance with specifiedfinancial ratios. Our ability to comply with these ratios may be affected byevents beyond our control.

 

The restrictions contained in our senior credit facility and theindentures could:

 

·                  limit our ability to plan for or react tomarket or economic conditions or meet capital needs or otherwise restrict ouractivities or business plans; and

·                  adversely affect our ability to finance ouroperations, acquisitions, investments or strategic alliances or other capitalneeds or to engage in other business activities that would be in our interest.

 

A breach of any of these covenants or our inability to comply with therequired financial ratios could result in a default under our senior creditfacility and/or the indentures. If an event of default occurs under our seniorcredit facility, which includes an event of default under the indenturesgoverning the notes, the lenders could elect to:

 

·                  declare all borrowings outstanding, togetherwith accrued and unpaid interest, to be immediately due and payable;

·                  require us to apply all of our available cashto repay the borrowings; or

·                  prevent us from making debt service paymentson the notes;

 

any of which could result in an event of default under the notes. Thelenders will also have the right in these circumstances to terminate anycommitments they have to provide further financing.

 

If we were unable to repay or otherwise refinance these borrowings whendue, our lenders could sell the collateral securing our senior credit facility,which constitutes substantially all of our and our domestic wholly-ownedsubsidiaries’ assets (other then certain assets relating to portfoliotransactions). Although holders of the notes could accelerate the notes uponthe acceleration of the obligations under our senior credit facility, we cannotassure you that sufficient assets will remain to repay the notes after we havepaid all the borrowings under our senior credit facility and any other seniordebt.

 

**We are a holding company and wedepend upon cash from our subsidiaries to service our debt. If we do notreceive cash distributions, dividends or other payments from our subsidiaries,we may be unable to make payments on the notes.**

 

We are a holding company and all of our operations are conductedthrough our subsidiaries. Accordingly, we are dependent upon the earnings andcash flows of, and cash distributions, dividends and other payments from, oursubsidiaries to provide the funds necessary to meet our debt serviceobligations, including the required payments on the notes. If we do not receivesuch cash distributions, dividends or other payments from our subsidiaries, wemay be unable to pay the principal or interest on the notes. In addition,certain of our subsidiaries who are guarantors of the notes are holdingcompanies that will rely on subsidiaries of their own as a source of funds tomeet any obligations that might arise under their guarantees.

 

Generally, the ability of a subsidiary to make cash available to itsparent is affected by its own operating results and is subject to applicablelaws and contractual restrictions contained in its debt instruments and otheragreements. Although the indentures governing the notes will limit the extentto which our subsidiaries may restrict their ability to make dividend and otherpayments to 

 

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us, theselimitations will be subject to significant qualifications and exceptions. Theindentures governing the notes also allow us to include the operating resultsof our subsidiaries in our consolidated Adjusted EBITDA, as defined in theindentures, for the purpose of determining whether we can incur additionalindebtedness under the indentures, even though some of those subsidiaries aresubject to contractual restrictions on making dividends or distributions ofcash to us for the purposes of servicing such indebtedness. In addition, theindentures allow us to create limitations on distributions and dividends underthe terms of our and any of our subsidiaries’ future credit facilities.Moreover, there may be restrictions on payments by our subsidiaries to us underapplicable laws, including laws that require companies to maintain minimumamounts of capital and to make payments to stockholders only from profits. As aresult, although our subsidiaries may have cash, we or our subsidiary guarantorsmay be unable to obtain that cash to satisfy our obligations under the notes orthe guarantees, as applicable.

 

**Each noteholder’s right to receivepayments on the notes is effectively junior to those lenders who have asecurity interest in our assets.**

 

Our obligations under the notes and our guarantors’ obligations undertheir guarantees of the notes are unsecured, but our obligations under oursenior credit facility and each guarantor’s obligations under their respectiveguarantees of the senior credit facility are secured by a security interest insubstantially all of our domestic tangible and intangible assets (other thancertain assets relating to portfolio transactions) and the assets and a portionof the stock of certain of our non-U.S. subsidiaries. If we are declaredbankrupt or insolvent, or if we default under our senior credit facility, thelenders could declare all of the funds borrowed thereunder, together withaccrued interest, immediately due and payable. If we were unable to repay suchindebtedness, the lenders could foreclose on the pledged assets to theexclusion of holders of the notes, even if an event of default exists under theindentures governing the notes at such time. Furthermore, if the lendersforeclose and sell the pledged equity interests in any subsidiary guarantorunder the notes, then that guarantor will be released from its guarantee of thenotes automatically and immediately upon such sale. In any such event, becausethe notes are not secured by any of our assets or the equity interests insubsidiary guarantors, it is possible that there would be no assets remainingfrom which noteholders’ claims could be satisfied or, if any assets remained,they might be insufficient to satisfy noteholders’ claims fully.

 

As of December 31, 2008, the notes and the guarantees weresubordinated or effectively subordinated to $670.1 million of indebtedness(representing borrowings under our senior credit facility which did not includeavailability of approximately $193,000 under the revolving portion of oursenior credit facility after giving effect to letters of credit outstanding asof December 31, 2008). The indentures will permit the incurrence ofsubstantial additional indebtedness by us and our restricted subsidiaries inthe future, including secured indebtedness.

 

**Claims of noteholders will bestructurally subordinate to claims of creditors of all of our non-U.S.subsidiaries and some of our U.S. subsidiaries because they have not guaranteedthe notes.**

 

The notes are not guaranteed by any of our non-U.S. subsidiaries, andcertain other domestic subsidiaries. Accordingly, claims of holders of thenotes will be structurally subordinate to the claims of creditors of thesenon-guarantor subsidiaries, including trade creditors. All obligations of ournon-guarantor subsidiaries will have to be satisfied before any of the assetsof such subsidiaries would be available for distribution, upon a liquidation orotherwise, to us or a guarantor of the notes.

 

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As of December 31, 2008, our non-guarantor subsidiaries had totalliabilities (excluding intercompany liabilities) of $98.9 million, representing6.9 percent of our total consolidated liabilities. Our non-guarantorsubsidiaries accounted for $344.8 million, or 22.8 percent of our consolidatedrevenue, and had $49.9 million of net loss, compared to our consolidated netloss of $337.1 million, for the year ended December 31, 2008. In addition,our non-guarantor subsidiaries accounted for $261.0 million, or 15.3 percent,of our consolidated assets at December 31, 2008.

 

Because a portion of our operations are conducted by subsidiaries thathave not guaranteed the notes, our cash flow and our ability to service debt,including our and the guarantors’ ability to pay the interest on and principalof the notes when due, are dependent to a significant extent on interestpayments, cash dividends and distributions and other transfers of cash fromsubsidiaries that have not guaranteed the notes. In addition, any payment ofinterest, dividends, distributions, loans or advances by subsidiaries that havenot guaranteed the notes to us and the guarantors, as applicable, could besubject to taxation or other restrictions on dividends or repatriation ofearnings under applicable local law, monetary transfer restrictions and foreigncurrency regulations in the jurisdiction in which these subsidiaries operate.Moreover, payments to us and the guarantors by subsidiaries that have notguaranteed the notes will be contingent upon these subsidiaries’ earnings.

 

Our subsidiaries that have not guaranteed the notes are separate anddistinct legal entities and have no obligation, contingent or otherwise, to payany amounts due pursuant to the notes, or to make any funds availabletherefore, whether by dividends, loans, distributions or other payments. Anyright that we or the guarantors have to receive any assets of any subsidiariesthat have not guaranteed the notes upon the liquidation or reorganization ofthose subsidiaries, and the consequent rights of holders of notes to realizeproceeds from the sale of any of those subsidiaries’ assets, will beeffectively subordinated to the claims of that subsidiary’s creditors,including trade creditors and holders of debt of that subsidiary.

 

We also have joint ventures and subsidiaries in which we own less than100 percent of the equity so that, in addition to the structurally seniorclaims of creditors of those entities, the equity interests of our jointventure partners or other stockholders in any dividend or other distributionmade by these entities would need to be satisfied on a proportionate basis withus. These joint ventures and less than wholly-owned subsidiaries may also besubject to restrictions on their ability to distribute cash to us in theirfinancing or other agreements and, as a result, we may not be able to accesstheir cash flow to service our debt obligations, including in respect of thenotes.

 

**Each noteholder’s right to receivepayments on the notes is junior to all of our existing and future seniorindebtedness and the guarantees of the notes is junior to all the guarantors’existing and future senior indebtedness.**

 

The notes are general unsecured obligations that are junior in right ofpayment to all our existing and future senior indebtedness, including oursenior credit facility. The guarantees are general unsecured obligations of theguarantors that are junior in right of payment to all of the applicableguarantor’s existing and future senior indebtedness, including our seniorcredit facility.

 

We and the guarantors may not pay principal, premium, if any, interestor other amounts on account of the notes or the guarantees in the event of apayment default or certain other defaults in respect of certain of our seniorindebtedness, including debt under our senior credit facility, unless thesenior indebtedness has been paid in full or the default has been cured orwaived. In addition, in the event of certain other defaults with respect to thesenior indebtedness, we or the guarantors may not be permitted to pay anyamount on account of the notes or the guarantees for a designated 

 

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period of time.

 

The subordination provisions in the notes and the guarantees providethat, in the event of a bankruptcy, liquidation or dissolution of us or anyguarantor, our or the guarantor’s assets will not be available to payobligations under the notes or the applicable guarantee until we or theguarantor has made all payments on its respective senior indebtedness. We andthe guarantors may not have sufficient assets after all these payments havebeen made to make any payments on the notes or the applicable guarantee,including payments of principal or interest when due.

 

As of December 31, 2008, the notes and the guarantees weresubordinated or effectively subordinated to $670.1 million of indebtedness(representing borrowings under our senior credit facility which did not includeavailability of approximately $193,000 under the revolving portion of oursenior credit facility after giving effect to letters of credit outstanding asof December 31, 2008). The indentures will permit the incurrence ofsubstantial additional indebtedness, including senior debt, by us and ourrestricted subsidiaries in the future.

 

**If we default on our obligations topay our other indebtedness, we may be unable to make payments on the notes.**

 

Any default under the agreements governing our indebtedness, includinga default under our senior credit facility that is not waived by the requiredlenders, and the remedies sought by the holders of such indebtedness could makeus unable to pay principal, premium, if any, and interest on the notes andsubstantially decrease the market value of the notes. If we are unable togenerate sufficient cash flow and are otherwise unable to obtain fundsnecessary to meet required payments of principal, premium, if any, and intereston our indebtedness, or if we otherwise fail to comply with the variouscovenants, including financial and operating covenants, in the instrumentsgoverning our indebtedness (including our senior credit facility), we could bein default under the terms of the agreements governing such indebtedness. Inthe event of such default, the holders of such indebtedness could elect todeclare all the funds borrowed thereunder to be due and payable, together withaccrued and unpaid interest, the lenders under the revolving portion of oursenior credit facility could elect to terminate their commitments, cease makingfurther loans and institute foreclosure proceedings against our assets, and wecould be forced into bankruptcy or liquidation. If our operating performancedeclines, we may in the future need to seek and obtain waivers from therequired lenders under our senior credit facility to avoid being in default. Ifwe breach our covenants under our senior credit facility and seek a waiver, wemay not be able to obtain a waiver from the required lenders. If this occurs,we would be in default under our senior credit facility, the lenders couldexercise their rights as described above, and we could be forced intobankruptcy or liquidation.

 

**Federal and state fraudulent transferlaws may permit a court to void the notes and the guarantees and if thatoccurs, noteholders may not receive any payments on the notes.**

 

The issuance of the notes and the guarantees may be subject to reviewunder federal bankruptcy law or relevant state fraudulent transfer andconveyance statutes. While the relevant laws may vary from state to state,under such laws, generally, the payment of consideration will be a fraudulentconveyance if (1) we paid the consideration with the intent of hindering,delaying or defrauding creditors or (2) we or any of the guarantors, asapplicable, received less than reasonably equivalent value or fairconsideration in return for issuing either the notes or a guarantee, and, inthe case of (2) only, one of the following is also true:

 

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·                  we or any of the guarantors was insolvent orrendered insolvent by reason of the incurrence of the indebtedness; or

·                  payment of the consideration left us or anyof the guarantors with an unreasonably small amount of capital to carry on thebusiness; or

·                  we or any of the guarantors intended to, orbelieved that it would, incur debts beyond its ability to pay as they mature.

 

If a court were to find that the issuance of the notes or a guaranteewas a fraudulent conveyance, the court could void the payment obligations underthe notes or such guarantee or further subordinate the notes or such guaranteeto presently existing and future indebtedness of ours or such guarantor, orrequire the holders of the notes to repay any amounts received with respect tothe notes or such guarantee. In the event of a finding that a fraudulentconveyance occurred, noteholders may not receive any repayment on the notes.Further, the voidance of the notes could result in an event of default withrespect to our and our subsidiaries’ other debt that could result in theacceleration of such debt.

 

Generally, an entity would be considered insolvent if, at the time itincurred indebtedness:

 

·                  the sum of its debts, including contingentliabilities, was greater than the fair salable value of all its assets; or

·                  the present fair salable value of its assetswas less than the amount that would be required to pay its probable liabilityon its existing debts and liabilities, including contingent liabilities, asthey become absolute and mature; or

·                  it could not pay its debts as they becomedue.

 

We cannot be certain as to the standards a court would use to determinewhether or not we or the guarantors were solvent at the relevant time, orregardless of the standard that a court uses, that the issuance of the notesand the guarantees would not be further subordinated to our or any of ourguarantors’ other debt.

 

If the guarantees were legally challenged, any guarantee could also besubject to the claim that, since the guarantee was incurred for our benefit,and only indirectly for the benefit of the applicable guarantor and none of theproceeds of the notes were paid to any guarantor, the obligations of theapplicable guarantor were incurred for less than fair consideration. A courtcould thus void the obligations under the guarantees, subordinate them to theapplicable guarantor’s other debt or take other action detrimental to theholders of the notes.

 

**Noteholders’ ability to transfer thenotes may be limited by the absence of an active trading market, and there isno assurance that any active trading market will develop for the notes.**

 

The notes are securities for which there is no existing public market.Accordingly, the development or liquidity of any market for the notes isuncertain. We cannot assure noteholders as to the liquidity of markets that maydevelop for the notes, noteholders’ ability to sell the notes or the price atwhich noteholders would be able to sell the notes. We do not intend to applyfor a listing of the notes on a securities exchange or on any automated dealerquotation system.

 

The placement agents of the notes have advised us that they intend tomake a market in the notes, as permitted by applicable laws and regulations.However, the placement agents are not obligated to make a market in the notes,and they may discontinue their market-making activities at any time withoutnotice. Additionally, we are controlled by One Equity Partners, an affiliate of

 

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J.P. MorganSecurities Inc., one of the placement agents of the notes. As a result of thisaffiliate relationship, if J.P. Morgan Securities Inc. conducts any marketmaking activities with respect to the notes, J.P. Morgan Securities Inc. willbe required to deliver a market making prospectus when effecting offers andsales of the notes. For as long as a market making prospectus is required to bedelivered, the ability of J.P. Morgan Securities Inc. to make a market in thenotes may, in part, be dependent on our ability to maintain a current marketmaking prospectus for its use. If we are unable to maintain a current marketmaking prospectus, J.P. Morgan Securities Inc. may be required to discontinueits market making activities without notice. Therefore, we cannot assure youthat an active market for the notes or notes will develop or, if developed,that it will continue. Historically, the market for non-investment grade debthas been subject to disruptions that have caused substantial volatility in theprices of securities similar to the notes. The market, if any, for the notesmay experience similar disruptions and any such disruptions may adverselyaffect the prices at which noteholders may sell the notes. In addition, thenotes may trade at discounts from their initial offering prices, depending uponprevailing interest rates, the market for similar notes, our financial andoperating performance and other factors.

 

**Item 1B.****                     UnresolvedStaff Comments**

 

Not Applicable

 

**Item 2.****                              Properties**

 

The following table summarizes thelocations of our facilities by segment. Certain of our facilities are used forboth ARM and CRM operations. Portfolio Management operates in one of the ARM OnlyU.S. facilities and one of the ARM and CRM U.S. facilities. We lease all butone of these facilities. The leases expire between 2009 and 2022, and mostcontain renewal options.

 
| ** **     | ** ** | **ARM  Only** | ** ** | **CRM  Only** | ** ** | **ARM  and  CRM** | ** ** | **Total** | ** ** |
|----------------|------------|---------------|------------|---------------|------------|-------------------|------------|-----------|------------|
| U.S.           |       | 61            |       | 4             |       | 7                 |       | 72        |       |
| Canada         |       | 5             |       | 4             |       | 2                 |       | 11        |       |
| Australia      |       | 5             |       | —        |       | —            |       | 5         |       |
| Panama         |       | —        |       | 3             |       | 2                 |       | 5         |       |
| United Kingdom |       | 3             |       | —        |       | —            |       | 3         |       |
| Philippines    |       | —        |       | —        |       | 3                 |       | 3         |       |
| Barbados       |       | —        |       | —        |       | 1                 |       | 1         |       |
| Antigua        |       | —        |       | —        |       | 1                 |       | 1         |       |
| Puerto Rico    |       | 2             |       | —        |       | —            |       | 2         |       |
| Mexico         |       | 6             |       | —        |       | —            |       | 6         |       |
| Total          |       | 82            |       | 11            |       | 16                |       | 109       |       |

 

We believe that our facilities areadequate for our current operations, but additional facilities may be requiredto support growth. We believe that suitable additional or alternative spacewill be available as needed on commercially reasonable terms.

 

**Item 3.          LegalProceedings**

 

*Fort Washington Flood:*

 

In June 2001,the first floor of our Fort Washington, Pennsylvania, headquarters was severelydamaged by a flood caused by remnants of Tropical Storm Allison. Wesubsequently decided to relocate our corporate headquarters to Horsham,Pennsylvania. We filed a lawsuit on August 14, 

 

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2001 in the Court of Common Pleas,Montgomery County, Pennsylvania (Civil Action No. 01-15576) against thecurrent landlord and the former landlord of the Fort Washington facilities toterminate the leases and to obtain other relief. The landlord and formerlandlord have filed counter-claims against us. We maintain a reserve that webelieve is adequate to address our exposure to this matter and we plan tocontinue to contest this matter.

 

*U.S. Department of Justice:*

 

On February 24, 2006, the U.S. Department of Justice alleged certaincivil damages of approximately $5.0 million. The alleged damages relate to amatter we reported to federal authorities and the client in 2003 involvingthree employees who engaged in unauthorized student loan consolidations inconnection with a client contract. The responsible employees were terminated atthat time in 2003. We do not agree with the allegations regarding damages andhave and will continue to engage in discussions with the Department of Justicein an effort to amicably resolve the matter. We expect that actual damagesincurred as a result of this incident, if any, will be covered by insurance.

 

*Tax Matters:*

 

In 2004, we received notice of a proposed reassessment from a foreigntaxing authority relating to certain matters occurring from 1998 through 2001regarding one of our subsidiaries. In September 2006, we received theformal notice of reassessment in the amount of $13.9 million including interestand penalties, converted as of December 31, 2008 ($14.6 million convertedas of December 31, 2006), and in December 2006 we paid a deposit of$8.5 million. We maintain a reserve that we believe is adequate to address ourexposure to this matter.

 

We are under audit by the State of Texas for alleged improper collectionof state sales tax on collection services. Under Texas law, both client anddebtor need to be within the state to create a taxable transaction. The Stateof Texas issued an initial assessment, which was subsequently reduced toapproximately $3.5 million after working with our clients, and was paid in March 2008.

 

*Attorneys General:*

 

From time to time, we receive subpoenas or other similar informationrequests from various states’ Attorneys General, requesting informationrelating to our Company’s debt collection practices in such states. We respondto such inquires or investigations and provide certain information to therespective Attorneys General offices. We believe we are in compliance with thelaws of the states in which we do business relating to debt collection practicesin all material respects. However, no assurance can be given that any suchinquiries or investigations will not result in a formal investigation or anenforcement action. Any such enforcement actions could result in fines as wellas the suspension or termination of our ability to conduct business in suchstates.

 

*Other:*

 

We are involved in other legal proceedings, regulatory investigations andtax examinations from time to time in the ordinary course of business.Management believes that none of these other legal proceedings, regulatoryinvestigations, or tax examinations will have a materially adverse effect onour financial condition or results of operations.

 

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**Item 4.****          Submission of Mattersto a Vote of Security Holders**

 

None.

 

**PART II**

 

**Item 5.****          Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Thereis no established public trading market for each of our Class A commonstock and our Class L common stock, and all of our outstanding commonequity is privately held.  As of March 31,2009, there were 51 holders of record of our Class A common stock(including holders of our restricted stock) and 19 holders of our Class Lcommon stock.

 

Ourability to pay cash dividends on our capital stock is limited by the terms ofour senior credit facility and the indentures governing the terms of ournotes.  We do not anticipate paying acash dividend on our capital stock in the near future. See Note 14 in our Notesto Consolidated Financial Statements for the year ended December 31, 2008for disclosure of information regarding the payment of dividends.

 

See Part III, Item 12 of this Form 10-Kfor information regarding equity compensation plan information.

 

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**Item 6.****          Selected FinancialData**

 

**SELECTED FINANCIAL DATA(1)**

**(Amounts in thousands)**

 
| ** **                                           | ** ** | **Successor**                                                 | ** ** | ** **            | ** ** | **Successor**         | ** ** | **Predecessor**                   | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **Period from**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                                    | ** ** | ** **            | ** ** | **Combined**          | ** ** | **July 13, 2006**       | ** ** | **Period from** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                                    | ** ** | ** **            | ** ** | **For the**      | ** ** | **(date of inception)** | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                                    | ** ** | ** **            | ** ** | **year ended**   | ** ** | **through**                       | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **For the years ended December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **November 15,**             | ** ** | **For the years ended December 31,** | ** ** |
| ** **                                           | ** ** | **2008(2)**                                                   | ** ** | **2007**              | ** ** | **2006****(3)(4)**    | ** ** | **2006(5)**                       | ** ** | **2006(6)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statement  of Operations Data:**                   |       |                                                          |       |                  |       |                  |       |                              |       |   |   |   |   |   |   |
| Revenues:                                            |       |                                                          |       |                  |       |                  |       |                              |       |   |   |   |   |   |   |
| Services                                             |       | $                                                             | 1,492,110  |                  | $          | 1,131,924             |       | $                                 | 1,008,146  |   | $ | 132,808 |   | $ | 875,338 |   | $ | 906,258 |   | $ | 840,346 |   |
| Portfolio                                            |       | 18,029                                                        |       | 132,413               |       | 165,263               |       | 13,557                            |       | 151,706 |   | 133,868 |   | 99,451 |   |
| Portfolio sales                                      |       | 3,002                                                         |       | 21,093                |       | 22,757                |       | —                            |       | 22,757 |   | 12,157 |   | — |   |
| Total revenues                                       |       | 1,513,141                                                     |       | 1,285,430             |       | 1,196,166             |       | 146,365                           |       | 1,049,801 |   | 1,052,283 |   | 939,797 |   |
| Operating costs  and expenses:                       |       |                                                          |       |                  |       |                  |       |                              |       |   |   |   |   |   |   |
| Payroll and  related expenses                        |       | 845,481                                                       |       | 679,951               |       | 633,048               |       | 79,165                            |       | 553,883 |   | 528,932 |   | 472,915 |   |
| Selling, general  and administrative expenses        |       | 562,339                                                       |       | 459,170               |       | 425,272               |       | 50,122                            |       | 375,150 |   | 376,606 |   | 324,187 |   |
| Depreciation and  amortization expense               |       | 121,324                                                       |       | 102,349               |       | 58,923                |       | 12,228                            |       | 46,695 |   | 45,787 |   | 40,225 |   |
| Impairment of  intangible assets                     |       | 289,492                                                       |       | —                |       | 69,898                |       | 69,898                            |       | — |   | — |   | — |   |
| Restructuring  charges                               |       | 11,600                                                        |       | —                |       | 12,765                |       | —                            |       | 12,765 |   | 9,621 |   | — |   |
| (Loss) income  from operations                       |       | (317,095                                                      | )          | 43,960                |       | (3,740                | )          | (65,048                           | )          | 61,308 |   | 91,337 |   | 102,470 |   |
| Other expense                                        |       | 110,208                                                       |       | 89,051                |       | 36,064                |       | 14,422                            |       | 21,642 |   | 19,423 |   | 17,612 |   |
| (Loss) income  before provision for income taxes     |       | (427,303                                                      | )          | (45,091               | )          | (39,804               | )          | (79,470                           | )          | 39,666 |   | 71,914 |   | 84,858 |   |
| Income tax  (benefit) expense                        |       | (71,947                                                       | )          | (16,104               | )          | 11,220                |       | (3,522                            | )          | 14,742 |   | 26,182 |   | 32,389 |   |
| (Loss) income  before minority interest              |       | (355,356                                                      | )          | (28,987               | )          | (51,024               | )          | (75,948                           | )          | 24,924 |   | 45,732 |   | 52,469 |   |
| Minority interest                                    |       | 18,250                                                        |       | (2,735                | )          | (4,047                | )          | (157                              | )          | (3,890 | ) | (1,213 | ) | (606 | ) |
| Net (loss) income                                    |       | $                                                             | (337,106   | )                     | $          | (31,722               | )          | $                                 | (55,071    | ) | $ | (76,105 | ) | $ | 21,034 |   | $ | 44,519 |   | $ | 51,863 |   |
|                                                 |       |                                                          |       |                  |       |                  |       |                              |       |   |   |   |   |   |   |
| **Statement  of Cash Flows Data:**                   |       |                                                          |       |                  |       |                  |       |                              |       |   |   |   |   |   |   |
| Net cash provided  by (used in) operating activities |       | $                                                             | 93,733     |                  | $          | 43,995                |       | $                                 | 104,715    |   | $ | (4,957 | ) | $ | 109,672 |   | $ | 89,550 |   | $ | 99,019 |   |
| Net cash used in  investing activities               |       | (424,159                                                      | )          | (32,719               | )          | (1,006,275            | )          | (990,329                          | )          | (15,946 | ) | (221,994 | ) | (1,458 | ) |
| Net cash provided  by (used in) financing activities |       | 332,204                                                       |       | (2,869                | )          | 914,898               |       | 1,010,775                         |       | (95,877 | ) | 130,147 |   | (119,542 | ) |

 
| ** **                              | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                              | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** |   | **2004** |   |
| **Balance  Sheet Data:**                |       |                  |       |                  |       |   |   |   |   |   |   |
| Cash and cash  equivalents              |       | $                     | 29,880     |                  | $          | 31,283 |   | $ | 20,703 |   | $ | 23,716 |   | $ | 26,334 |   |
| Working capital                         |       | 151,547               |       | 162,471               |       | 200,398 |   | 171,587 |   | 73,547 |   |
| Total assets                            |       | 1,701,639             |       | 1,677,999             |       | 1,692,673 |   | 1,327,962 |   | 1,113,889 |   |
| Long-term debt,  net of current portion |       | 1,048,517             |       | 903,052               |       | 892,271 |   | 321,834 |   | 186,339 |   |
| Minority interest                       |       | 22,803                |       | 48,948                |       | 55,628 |   | 34,643 |   | — |   |
| Stockholders’  equity              |       | 260,986               |       | 408,045               |       | 420,434 |   | 743,114 |   | 695,601 |   |
|                                         |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   This data should be read in conjunction with the consolidated financialstatements, including the accompanying notes, included elsewhere in this Reporton Form 10-K.

(2)   The Company acquired Outsourcing Solutions, Inc. on February 29,2008 (see note 4 in the Company’s Notes to Consolidated Financial Statements,included elsewhere in this Report on Form 10-K). Also includes $289.5million of impairment charges to goodwill and trade name, and $15.2 million ofmerger, restructuring and integration costs.

(3)   The combined results for the year ended December 31,2006 represent the addition of the Predecessor period from January 1, 2006through November 15, 2006 and the Successor period from July 13, 2006through December 31, 2006. Collect Holdings was formed on July 13,2006 (there were no operations from the date of inception until the Transactionon November 15, 2006). This combination does not comply with GAAP or withthe rules of pro forma presentation, however we believe it providesinvestors the most meaningful comparison of our results. The combined operatingresults do not reflect the actual results we would have achieved if theTransaction did not occur and may not be predictive of future results ofoperations.

(4)   Includes $33.9 million, net of taxes, ofcharges and costs related to the Transaction and restructuring and integrationplans.

(5)   Includes $22.8 million, net of taxes, ofcharges and costs related to the Transaction, and a $69.9 million SST goodwillimpairment charge.

(6)   Includes $11.1 million, net of taxes, ofcharges and costs related to the Transaction and restructuring and integrationplans.

 

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**Item 7.****          Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

On November 15,2006, NCO Group, Inc. was acquired by and became a wholly owned subsidiaryof Collect Holdings Inc., an entity controlled by One Equity Partners and itsaffiliates, with participation by Michael J. Barrist, Chairman, President andChief Executive Officer of NCO Group, Inc., certain other members of executivemanagement and other co-investors, referred to as the Transaction. Under theterms of the merger agreement, NCO Group, Inc. shareholders received$27.50 in cash, without interest, for each share of NCO Group, Inc. commonstock that they held. On February 27, 2007, NCO Group, Inc. wasmerged with and into Collect Holdings, Inc. and the surviving corporationwas renamed NCO Group, Inc. The accompanying consolidated financialstatements are presented for two periods, Predecessor and Successor which relateto the period of operations preceding the Transaction and the period ofoperations succeeding the Transaction, respectively. Collect Holdings wasformed on July 13, 2006 (there were no operations from the date ofinception until the Transaction on November 15, 2006). We have preparedour discussion of the 2006 results of operations by comparing the mathematicalcombination, without making any pro forma adjustments, of the Successor andPredecessor periods in the year ended December 31, 2006. This unauditedpresentation does not comply with generally accepted accounting principles(GAAP); however, we believe it provides the most meaningful comparison of ourresults. The combined operating results have not been prepared as pro formaresults under applicable regulations and may not reflect the actual results wewould have achieved if the Transaction did not occur and may not be predictiveof future results of operations.

 

We area holding company and conduct substantially all of our business operationsthrough our subsidiaries. We are an international provider of business processoutsourcing services, referred to as BPO, primarily focused on accountsreceivable management, referred to as ARM, and customer relationshipmanagement, referred to as CRM, serving a wide range of clients in NorthAmerica and abroad through our global network of over 100 offices. We alsopurchase and collect past due accounts receivable from consumer creditors suchas banks, finance companies, retail merchants, utilities, healthcare companies,and other consumer-oriented companies.

 

We operate ourbusiness in three segments: ARM, CRM and Portfolio Management.

 

During2008, we generated approximately 60 percent of our ARM revenue from therecovery of delinquent accounts receivable on a contingency fee basis. Our ARMcontingency fees range from six percent for the management of accounts placedearly in the accounts receivable cycle to 49 percent for accounts that havebeen serviced extensively by the client or by third-party providers. Ouraverage fee for ARM contingency-based revenue across all industries wasapproximately 17 percent during 2008, 2007, and 2006. In addition, we generaterevenue from certain contractual ARM services. Generally, revenue is earned andrecognized upon collection of accounts receivable for contingency fee servicesand as work is performed for contractual services. We enter into contracts withmost of our clients that define, among other things, fee arrangements, scope ofservices, and termination provisions. Clients typically have the right toterminate their contracts on 30 or 60 days’ notice. Approximately 40 percent ofour ARM revenue is generated from contractual collection services, where feesare based on a monthly rate or a per service charge, and other ARM services.

 

During2008, approximately 88 percent of our CRM revenue was generated from inboundservices, which consist primarily of customer service and technical supportprograms, and to a 

 

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lesser extent acquisition andretention services. Inbound services involve the processing of incoming calls,often placed by our clients’ customers using toll-free numbers, to a customerservice representative for service, order fulfillment or information. During2008, outbound services, which consist of customer acquisition and customerretention services, represented approximately 12 percent of our CRM revenue.

 

Ouroperating costs consist principally of payroll and related costs; selling,general and administrative costs; and depreciation and amortization. Payrolland related expenses consist of wages and salaries, commissions, bonuses, andbenefits for all of our employees, including management and administrativepersonnel. Selling, general and administrative expenses include telephone,postage and mailing costs, outside collection attorneys and other third-partycollection services providers, and other collection costs, as well as expensesthat directly support operations, including facility costs, equipmentmaintenance, sales and marketing, data processing, professional fees, and othermanagement costs.

 

As aresult of the annual impairment testing completed during the fourth quarter of2008, we recorded goodwill and trade name impairment charges of $289.5 million.Additionally, revenue for 2008 was reduced by a $98.9 million impairment chargerecorded to increase the valuation allowance against the carrying value of theportfolios of purchased accounts receivable.

 

Duringthe second half of 2007 and during 2008, our payroll and related expenses werenegatively impacted by the decline in the U.S. dollar against the Canadiandollar.

 

Changesto the economic conditions in the U.S., either positive or negative, could havea significant impact on our business, including, but not limited to:

 

·      further impairmentcharges to our goodwill, trade name and purchased accounts receivable;

·      fluctuations in thevolume of placements of accounts and the collectability of those accounts forour ARM contingency fee based services;

·      volume fluctuations inour ARM fixed fee based services;

·      volume fluctuations inour CRM services; and,

·      variability in thecollectability of existing portfolios and the ability to purchase portfolios atacceptable prices for our Portfolio Management business.

 

Wehave grown rapidly, through both acquisitions as well as internal growth.  On January 2, 2008, we acquired Systems &Services Technologies, Inc., referred to as SST, a third-party consumerreceivable servicer, for $17.7 million. On February 29, 2008, we acquiredOutsourcing Solutions, Inc., referred to as OSI, a leading provider ofbusiness process outsourcing services, specializing primarily in accountsreceivable management services, for $339.0 million. During 2008, the Companyalso acquired several smaller companies, all of which were providers of ARMservices, for an aggregate purchase price of $9.3 million which was paid incash. On January 9, 2007, we acquired Statewide Mercantile Services,referred to as SMS, a provider of ARM services in Australia for approximately$2.1 million, which included SMS’ portfolio of purchased accounts receivable.During 2006, we completed two acquisitions: Australian Receivables Limited,referred to as ARL, a provider of ARM services in Australia, in July 2006for approximately $9.4 million; and Star Contact (BVI) Ltd and Call CenterTelemarketing Pro-Panama, S.A., referred to as Star Contact, a provider of CRMservices in Panama, in December 2006 for approximately $51.2 million.

 

Priorto the acquisition of SST on January 2, 2008, SST was a wholly ownedsubsidiary of 

 

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JPMorgan Chase & Co.,referred to as JPM. JPM also wholly owns OEP, which as described above has hada controlling interest in us since the Transaction on November 15, 2006.Financial Accounting Standards Board, referred to as FASB, Statement ofFinancial Accounting Standards No. 141, “Business Combinations,” referredto as SFAS 141, states that a “business combination” excludes transfers of netassets or exchanges of equity interests between entities under common control.SFAS 141 also states that transfers of net assets or exchanges of equityinterests between entities under common control should be accounted for similarto the pooling-of-interests method (“as-if pooling-of-interests”) in that theentity that receives the net assets or the equity interests initiallyrecognizes the assets and liabilities transferred at their carrying amounts inthe accounts of the transferring entity at the date of transfer. Because NCOand SST were under common control at the time of the SST acquisition, thetransfer of assets and liabilities of SST were accounted for at historical costin a manner similar to a pooling of interests. For financial accountingpurposes, the acquisition is viewed as a change in reporting entity and, as aresult, required restatement of our financial statements for all periodssubsequent to November 15, 2006, the date of the Transaction and the dateat which common control of NCO and SST by JPM commenced.

 

In “as-ifpooling-of-interests” accounting, financial statements of the previouslyseparate companies for periods prior to the combination are restated on acombined basis to furnish comparative information. Accordingly, ourconsolidated balance sheet as of December 31, 2007 and the consolidatedstatements of operations and cash flows for the year ended December 31,2007 and for the period from July 13, 2006 through December 31, 2006include SST’s financial position information as of December 31, 2007 andits results of operations and cash flows for the year ended December 31,2007 and for the one month ended December 31, 2006.

 

**CriticalAccounting Policies and Estimates**

 

*General*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and the accompanying notes. Actual results could differ from thoseestimates. We believe the following accounting policies and estimates are themost critical and could have the most impact on our results of operations. Fora discussion of these and other accounting policies, see note 2 in our Notes toConsolidated Financial Statements.

 

As aresult of the Transaction, the majority of our assets and liabilities,including our portfolio of accounts receivable, have been adjusted to theirfair value as of the date of the Transaction, in accordance with SFAS No. 141,“Business Combinations.” We made significant assumptions in determining thefair value of intangible assets and other assets and liabilities in connectionwith purchase accounting. Such adjustments to fair value and the allocation ofpurchase price between identifiable intangibles and goodwill (as discussedbelow) will have an impact on our revenues and profitability. Additionally, inaccordance with Emerging Issues Task Force Issue No. 88-16, “Basis inLeveraged Transactions,” a portion of the equity related to our managementstockholders was recorded at the stockholder’s predecessor basis and acorresponding portion of the acquired assets was reduced accordingly.

 

*Goodwill,Other Intangible Assets and Purchase Accounting*

 

Purchaseaccounting requires that assets acquired and liabilities assumed be recorded attheir fair value at the date of acquisition. Our balance sheet includes amountsdesignated as “Goodwill,”

 

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“Trade name” and “Customerrelationships and other intangible assets.” Goodwill represents the excess ofthe purchase price over the fair value of the net assets of acquiredbusinesses. Trade name represents the fair value of the NCO name. Otherintangible assets consist primarily of customer relationships, which representthe information and regular contact we have with our clients, and non-competeagreements.

 

As of December 31,2008, our balance sheet included goodwill, trade name and other intangiblesthat represented 33.2 percent, 5.0 percent and 19.6 percent of total assets,respectively, and 216.3 percent, 32.7 percent and 128.0 percent of stockholders’equity, respectively.

 

Goodwill and tradename are tested for impairment at least annually and as triggering eventsoccur. The test for impairment is performed at the reporting unit level andinvolves a two-step approach, the first step identifies any potentialimpairment and the second step measures the amount of the impairment, ifapplicable. The first test for potential impairment uses a fair value basedapproach, whereby the fair value of a reporting unit’s goodwill is compared toits carrying amount. If the fair value is less than the carrying amount, thereporting unit’s goodwill would be considered impaired and we could be requiredto take a charge to earnings, which could be material.

 

Late in 2008, ourARM and Portfolio Management reporting units experienced a significantreduction in the collectability of both customer-placed and purchased accountsreceivable resulting from deteriorating economic conditions. Due to theexpected impact of the economic environment, we reduced our 2009 budgetedexpectations for each of our reporting units. As a result, our 2008 annualimpairment test for goodwill and trade name indicated that the carrying valuesof all of our reporting units exceeded their fair values. Fair values weredetermined by using a combination of the market approach and income approach.Our fair value calculations were based on projected financial results that wereprepared in connection with our annual budget and forecasting process thatincluded the expected impact of the current economic environment. The fairvalue calculations were also based on other assumptions including long-termgrowth rates of 4 percent and weighted average cost of capital ranging from 13percent to 14 percent. As a result of the annual impairment testing, werecorded goodwill impairment charges of $275.5 million and trade nameimpairment charges of $14.0 million. The Company was not required to record anyimpairment charges based upon the annual impairment tests in 2007.

 

We makesignificant assumptions to estimate the future revenue and cash flows used todetermine the fair value of our reporting units. These assumptions includefuture growth rates, profitability, discount factors, market comparables,future tax rates, and other factors. Variations in any of these assumptionscould result in materially different calculations of impairment amounts. If theexpected revenue and cash flows are not realized, additional impairment lossesmay be recorded in the future.

 

We periodicallyevaluate the net realizable value of identifiable definite-lived intangibleassets for impairment, based on the estimated undiscounted future cash flows,whenever events or changes in circumstances indicate that the carrying amountof the asset may not be recoverable.

* *

*RevenueRecognition for Purchased Accounts Receivable*

 

In the ordinary course ofaccounting for purchased accounts receivable, estimates have been made bymanagement as to the amount of future cash flows expected from each portfolio.We have historical collection records for all of our purchased accountsreceivable, as well as debtor records since our entrance into this business andfor acquired businesses since 1986, which provides us a reasonable basis forour judgment that it is probable that we will ultimately collect the recordedamount of our purchased accounts receivable plus a premium or yield. Thehistorical collection amounts also provide a reasonable basis for determiningthe timing of the collections. We use all available information to forecast thecash flows of our purchased accounts receivable including, 

 

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but not limited to,historical collections, payment patterns on similar purchases, credit scores ofthe underlying debtors, seller’s credit policies, and location of the debtor.The estimated future cash flow of each portfolio is used to compute theinternal rate of return, referred to as the IRR, for each portfolio. The IRR isused to allocate collections between revenue and amortization of the carryingvalues of the purchased accounts receivable.

 

We apply the AmericanInstitute of Certified Public Accountants Statement of Position 03-3 “Accountingfor Certain Loans or Debt Securities Acquired in a Transfer,” referred to asSOP 03-3. SOP 03-3 addresses accounting for differences between contractualversus expected cash flows over an investor’s initial investment in certainloans when such differences are attributable, at least in part, to creditquality. SOP 03-3 does not allow the original estimate of the effectiveinterest, or the IRR, to be lowered for revenue recognition or for subsequenttesting for provision for impairments. If the original collection estimates arelowered, an allowance is established in the amount required to maintain theoriginal IRR. If collection estimates are raised, increases are first used torecover any previously recorded allowances and then recognized prospectivelythrough an increase in the IRR, which are realized over a portfolio’s remaininglife. Any increase in the IRR must be used for subsequent revenue recognitionand allowance testing.

 

If management came to adifferent conclusion as to the future estimated collections, it could have hada significant impact on the amount of revenue that was recorded from thepurchased accounts receivable. A five percent increase in the amount of futureexpected collections would have resulted in additional income of $3.8 millionfor the year ended December 31, 2008, largely as a result of lowerallowances since increases in future expected collections are recognized to theextent sufficient to recover any allowances or to increase the expected IRR. Afive percent decrease in the amount of future expected collections would haveresulted in additional loss of $3.8 million for the year ended December 31,2008, largely as a result of higher allowances.

 

*IncomeTaxes*

 

We account for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”referred to as SFAS 109, which requires that deferred tax assets andliabilities be recognized using enacted tax rates for the effect of temporarydifferences between the book and tax bases of recorded assets and liabilities.SFAS 109 also requires that deferred tax assets be reduced by a valuationallowance, if it is more likely than not that some portion or all of thedeferred tax asset will not be realized. Deferred taxes have not been providedon the cumulative undistributed earnings of foreign subsidiaries because suchamounts are expected to be reinvested indefinitely.

 

At December 31,2008, our balance sheet included deferred tax assets of $72.0 million for theassumed future utilization of federal net operating loss carryforwards. Webelieve that we will be able to utilize the net operating loss carryforwards sowe have not reduced the deferred tax asset by a valuation allowance. However, avaluation allowance of $31.4 million has been provided for a portion ofdeferred tax assets primarily relating to certain foreign and state netoperating losses and state tax credits, due to the uncertainty that they can berealized. The utilization of net operating loss carryforwards and tax credits isan estimate based on a number of factors beyond our control, including thelevel of taxable income available from successful operations in the future. Ifwe are unable to utilize the federal net operating loss carryforwards, it mayresult in incremental tax expense in future periods.

 

Our annual provision for incometaxes and the determination of the resulting deferred tax assets andliabilities involve a significant amount of judgment and are based on thelatest information available at the time. We are subject to audit within thefederal, state and international taxing jurisdictions, and these audits caninvolve complex issues that may require an extended 

 

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period of time to resolve. We maintain reserves forestimated tax exposures, which are ultimately settled primarily through thesettlement of audits within these tax jurisdictions, changes in applicable taxlaw, or other factors. We believe that an appropriate liability has beenestablished for financial statement purposes; however, actual results maydiffer from these estimates.

 

On January 1, 2007,we adopted FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes,” referred to as FIN 48, which clarifies the accounting foruncertainty in tax positions. FIN 48 requires that the impact of a taxposition, if that position is more likely than not of being sustained on audit,based on the technical merits of the position, be recognized in the financial statements. Theadoption of FIN 48 did not have a material impact on our financial position orresults of operations. As of December 31, 2008 and 2007, we had $8.3million and $9.1 million, respectively, in reserves for uncertain taxpositions, including penalties, that, if recognized, would affect the effectivetax rate.

 

We recognize interestrelated to uncertain tax positions in interest expense. As of December 31,2008 and 2007, we had approximately $4.0 million and $4.1 million,respectively, of accrued interest related to uncertain tax positions. TheCompany recognizes penalties related to uncertain tax positions in theprovision for income taxes.

 

We are subject tofederal, state and foreign income tax audits from time to time that couldresult in proposed assessments. We cannot predict with certainty how theseaudits will be resolved and whether we will be required to make additional taxpayments, which may or may not include penalties and interest. As of December 31,2008, we are subject to audit by the Internal Revenue Service for the tax yearsof 2006 and 2007. For most states and foreign countries where we conductbusiness, we are subject to examination for the preceding three to six years.In certain states and foreign countries, the period could be longer.

 

*Allowancefor Doubtful Accounts*

 

Allowances for doubtfulaccounts are determined based on estimates of losses related to customerreceivable balances. In establishing the appropriate provision for customerreceivables balances, we make assumptions with respect to their futurecollectibility. Our assumptions are based on an individual assessment of acustomer’s credit quality as well as subjective factors and trends, includingthe aging of receivable balances. Generally, these individual credit assessmentsoccur at regular reviews during the life of the exposure and consider factorssuch as a customer’s ability to meet and sustain their financial commitments, acustomer’s current financial condition and historical payment patterns. Oncethe appropriate considerations referred to above have been taken into account,a determination is made as to the probability of default. An appropriateprovision is made, which takes into account the severity of the likely loss onthe outstanding receivable balance. Our level of reserves for our customeraccounts receivable fluctuates depending upon all of the factors mentionedabove, in addition to any contractual rights that allow us to reduceoutstanding receivable balances through the application of future collections.If our estimate is not sufficient to cover actual losses, we would be requiredto take additional charges to our earnings.

 

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**Resultsof Operations**

 

The followingtable sets forth selected historical statement of operations data (amounts inthousands):

 
| ** **                            | ** ** | **Successor**                         | ** ** | **Combined**                          | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **Period from** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **July 13, 2006** | ** ** | **Period from** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **(date of inception)** | ** ** | **Jan. 1, 2006** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **through** | ** ** | **through** | ** ** |
| ** **                            | ** ** | **For the year ended** | ** ** | **For the year ended** | ** ** | **For the year ended** | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                            | ** ** | **December 31, 2008**       | ** ** | **December 31, 2007**       | ** ** | **December 31, 2006**       | ** ** | **2006**              | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **Amount**                            | ** ** | **Ratio**                             | ** ** | **Amount**                            | ** ** | **Ratio**             | ** ** | **Amount** | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Revenues                              |       | $                                     | 1,513,141  |                                  | 100.0      | %                                     | $          | 1,285,430             |       | 100.0 | % | $ | 1,196,166 |   | 100.0 | % | $ | 146,365 |   | $ | 1,049,801 |   |
| Payroll and  related expenses         |       | 845,481                               |       | 55.9                                  |       | 679,951                               |       | 52.9                  |       | 633,048 |   | 52.9 |   | 79,165 |   | 553,883 |   |
| Selling, general  and admin. Expenses |       | 562,339                               |       | 37.2                                  |       | 459,170                               |       | 35.7                  |       | 425,272 |   | 35.5 |   | 50,122 |   | 375,150 |   |
| Depreciation and amortization         |       | 121,324                               |       | 8.0                                   |       | 102,349                               |       | 8.0                   |       | 58,923 |   | 5.0 |   | 12,228 |   | 46,695 |   |
| Impairment of  intangible assets      |       | 289,492                               |       | 19.1                                  |       | —                                |       | —                |       | 69,898 |   | 5.8 |   | 69,898 |   | — |   |
| Restructuring  charges                |       | 11,600                                |       | 0.7                                   |       | —                                |       | —                |       | 12,765 |   | 1.1 |   | — |   | 12,765 |   |
| (Loss) income  from operations        |       | (317,095                              | )          | 21.0                                  |       | 43,960                                |       | 3.4                   |       | (3,740 | ) | 0.3 |   | (65,048 | ) | 61,308 |   |
| Other expense                         |       | 110,208                               |       | 7.3                                   |       | 89,051                                |       | 6.9                   |       | 36,064 |   | 3.0 |   | 14,422 |   | 21,642 |   |
| Income tax  expense (benefit)         |       | (71,947                               | )          | 4.8                                   |       | (16,104                               | )          | 1.2                   |       | 11,220 |   | 0.9 |   | (3,522 | ) | 14,742 |   |
| Minority interest                     |       | 18,250                                |       | 1.2                                   |       | (2,735                                | )          | 0.2                   |       | (4,047 | ) | 0.4 |   | (157 | ) | (3,890 | ) |
| Net income (loss)                     |       | $                                     | (337,106   | )                                     | 22.3       | %                                     | $          | (31,722               | )          | 2.5 | % | $ | (55,071 | ) | 4.6 | % | $ | (76,105 | ) | $ | 21,034 |   |

 

***Yearended December 31, 2008 Compared to Year ended December 31, 2007***

 

***Revenue.**** *Revenue increased$227.7 million, or 17.7 percent, to $1,513.1 million for 2008, from $1,285.4million in 2007. Revenue for the year ended December 31, 2008 was reducedby a $98.9 million impairment charge recorded to increase the valuationallowance against the carrying value of the portfolios of purchased accountsreceivable, including $726,000 in ARM for international portfolios. ARM, CRMand Portfolio Management accounted for $1,219.3 million, $361.1 million and$18.4 million, respectively, of the 2008 revenue. ARM’s revenue included $82.8million of intercompany revenue earned on services performed for PortfolioManagement and CRM’s revenue included $2.9 million of intercompany revenueearned on services performed for ARM, which were eliminated upon consolidation.For 2007, ARM, CRM and Portfolio Management accounted for $915.6 million,$328.6 million and $150.9 million, respectively. ARM’s revenue included $109.1million of intercompany revenue earned on services performed for PortfolioManagement and CRM’s revenue included $532,000 of intercompany revenue earnedon services performed for ARM, which were eliminated upon consolidation.

 

ARM’s revenue increased$303.7 million, or 33.2 percent, to $1,219.3 million in 2008, from $915.6million in 2007. The increase in ARM’s revenue was primarily attributable tothe acquisition of OSI on February 29, 2008, which added $337.3 million ofrevenue. This increase was offset in part by the weaker collection environmentduring 2008 and a $26.3 million decrease in fees from collection servicesperformed for Portfolio Management. Included in ARM’s intercompany service feesfor 2008, was $1.7 million of commissions from the sales of portfolios byPortfolio Management, compared to $12.8 million in 2007.

 

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CRM’s revenue increased$32.5 million, or 9.9 percent, to $361.1 million in 2008, from $328.6 millionin 2007. The increase in CRM’s revenue was primarily due to increased clientvolume, related to the implementation of new contracts during 2007 and 2008,partially offset by lower volumes from certain existing clients due to theimpact of the economy.

 

Portfolio Management’s revenue decreased $132.5 million, or 87.8 percent,to $18.4 million in 2008, from $150.9 million in 2007. Portfolio Management’scollections, excluding all portfolio sales, decreased $25.9 million, or 11.6percent, to $196.8 million in 2008, from $222.7 million in 2007. Revenue for2008 was reduced by a $98.2 million impairment charge recorded to increase thevaluation allowance against the carrying value of the portfolios of purchasedaccounts receivable, due to the impact of the deteriorating economic conditionson cash collected and lower estimates of future collections, compared to animpairment charge of $25.0 million in the prior year. Excluding the effect ofthe impairment charges and all portfolio sales, Portfolio Management’s revenuerepresented 57.1 percent of collections in 2008, as compared to 68.3 percent ofcollections in 2007. The remaining decrease in revenue and collectionsprimarily reflects the effect of the weaker collection environment during 2008.Portfolio sales for 2008 were $3.0 million compared to $21.1 million for 2007.

 

***Payroll and related expenses.***  Payroll and related expenses increased $165.5million to $845.5 million in 2008, from $680.0 million in 2007, and increasedas a percentage of revenue to 55.9 percent from 52.9 percent. The increase inpayroll and related expenses as a percentage of revenue was primarily attributableto the decrease in revenues due to the $98.9 impairment charge recorded onpurchased accounts receivables in the year ended December 31, 2008.

 

ARM’s payroll and related expenses increased $157.5million to $583.7 million in 2008, from $426.2 million in 2007, and increasedas a percentage of revenue to 47.9 percent from 46.5 percent. Payroll andrelated expenses increased primarily due to the acquisition of OSI on February 29,2008, and increased as a percentage of revenue due to the OSI acquisition aswell as the effect of the weaker collection environment on ARM’s revenue. Includedin ARM’s payroll and related expenses was $2.9 million of intercompany expenseto CRM, for services provided to ARM.

 

CRM’s payroll and related expenses increased $10.2million to $256.9 million in 2008, from $246.7 million in 2007, but decreasedas a percentage of revenue to 71.1 percent from 75.1 percent. The decrease as apercentage of revenue was primarily a result of our continuing deployment ofadditional staff in off-shore locations.

 

Portfolio Management’s payroll and related expensesincreased $171,000 to $7.8 million in 2008, from $7.6 million in 2007.Portfolio Management outsources all of its collection services to ARM and,therefore, has a relatively small fixed payroll cost structure.

 

***Selling, generaland administrative expenses.***  Selling, general and administrative expensesincreased $103.2 million to $562.3 million in 2008, from $459.2 million in2007, and increased as a percentage of revenue to 37.2 percent from 35.7percent. The increase in selling, general and administrative expenses as apercentage of revenue was primarily attributable to the decrease in revenuesdue to the $98.9 million impairment charge recorded on purchased accountsreceivables in 2008.

 

ARM’s selling, general and administrative expensesincreased $95.6 million to $496.9 million in 2008, from $401.2 million in 2007,but decreased as a percentage of revenue to 40.7 percent 

 

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from 43.8 percent. The increase in ARM’s selling,general and administrative expenses was primarily due to the OSI acquisition.The decrease in ARM’s selling, general and administrative expenses as apercentage of revenue was primarily attributable to leveraging ourinfrastructure over the larger revenue base.

 

CRM’s selling, general and administrative expensesincreased $7.4 million to $61.7 million in 2008, from $54.3 million in 2007,and increased as a percentage of revenue to 17.1 percent from 16.5 percent. Theincrease in CRM’s selling, general and administrative expenses as a percentageof revenue was primarily attributable to ramping up capacity due to increasingclient volumes, in advance of the offsetting revenue generation.

 

Portfolio Management’s selling, general andadministrative expenses decreased $26.2 million to $86.5 million in 2008, from$112.7 million in 2007, but increased as a percentage of revenue, not includingportfolio sales revenue and excluding the effect of impairment charges, to 76.2percent from 72.8 percent. The decrease in Portfolio Management’s selling,general and administrative expenses resulted from a $26.3 million decrease infees for collection services provided by ARM. The increase as a percentage ofrevenue was primarily due to the decrease in revenue due to lower collections. Includedin Portfolio Management’s selling, general and administrative expenses for 2008and 2007 was $82.8 million and $109.1 million, respectively, of intercompanyexpense to ARM, for services provided to Portfolio Management.

 

***Restructuringcharges.***  During2008 we incurred restructuring charges of $11.6 million related torestructuring of our legacy operations to streamline our cost structure, inconjunction with the OSI acquisition. The charges consisted primarily of costsassociated with the closing of redundant facilities and severance.

 

***Depreciation andamortization.*** Depreciation and amortization increased to $121.3 million in 2008, from$102.3 million in 2007. This increase was primarily attributable to theamortization of the customer relationships resulting from the OSI acquisition.

 

***Impairment of intangible assets.***  During the fourth quarter of 2008, the Companyperformed its annual impairment tests of goodwill and trade name and recordedimpairment charges totaling $289.5 million.

 

***Otherincome (expense).***  Interestexpense decreased to $94.8 million for 2008, from $95.3 million for 2007.  The decrease was attributable to lowerfloating interest rates on the senior credit facility and the senior notes. Thelower interest rates were partially offset by additional borrowings under thesenior credit facility primarily to fund a portion of the acquisition of OSI.Other income (expense), net for 2008 and 2007 included approximately $16.8million of net losses and $2.2 million of net gains, respectively, resultingfrom the settlement of certain foreign exchange contracts.

 

***Incometax (benefit) expense.***  For 2008, theeffective income tax rate decreased to 16.8 percent from 35.7 percent for 2007,due to losses in the domestic ARM, CRM and Portfolio Management businessescombined with income from certain foreign businesses, which are not subject toincome tax, and less income attributable to minority interests.

 

***Yearended December 31, 2007 Compared to Year ended December 31, 2006***

 

***Revenue.**** *Revenue increased$89.2 million, or 7.5 percent, to $1,285.4 million for 2007, from $1,196.2million in 2006. ARM, CRM and Portfolio Management accounted for $915.6million, $328.5 million and $150.9 million, respectively, of the 2007 revenue.ARM’s revenue included $109.1 million of intercompany revenue earned onservices performed for Portfolio Management 

 

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that was eliminated uponconsolidation. CRM’s revenue included $532,000 of intercompany revenue earnedon services performed for ARM that was eliminated upon consolidation.

 

ARM’s revenue increased$43.5 million, or 5.0 percent, to $915.6 million in 2007, from $872.1 millionin 2006. The increase in ARM’s revenue was primarily attributable to revenue of$70.0 million from SST in 2007 compared for $6.1 million for December 2006,offset partially by a weaker collection environment during 2007. Included inARM’s intercompany service fees for the year ended December 31, 2007, was$12.8 million of commissions from the sales of portions of older portfolios byPortfolio Management, compared to $10.3 million in 2006.

 

CRM’s revenue increased$77.3 million, or 30.8 percent, to $328.5 million in 2007, from $251.2 millionin 2006. The increase in CRM’s revenue was primarily due to increased client volumefollowing the implementation of new contracts during 2006 and 2007.

 

Portfolio Management’srevenue decreased $36.1 million, or 19.3 percent, to $150.9 million in 2007,from $187.0 million in 2006. Portfolio Management’s collections, excluding allportfolio sales, decreased $25.6 million, or 10.3 percent, to $222.7 million in2007, from $248.3 million in 2006. Portfolio Management’s revenue represented57.1 percent of collections, excluding all portfolio sales, in 2007, ascompared to 67.3 percent of collections, excluding all portfolio sales, in2006. The decrease in revenue primarily reflects a $25.0 million impairmentcharge recorded to establish a valuation allowance against the carrying valueof the portfolios. Excluding the effect of the impairment charge, PortfolioManagement’s revenue represented 68.3 percent of collections in 2007. Theincrease compared to the prior year was mainly attributable to lowercollections due to the weaker collection environment during 2007. Gains onsales of portfolios for the year ended December 31, 2007 were $21.1million compared to $22.8 million for the year ended December 31, 2006.

 

***Payroll and related expenses.***  Payroll and related expenses increased $47.0million to $680.0 million in 2007, from $633.0 million in 2006, and increasedas a percentage of revenue to 52.9 percent from 50.3 percent.

 

ARM’s payroll and related expenses increased $4.4million to $426.2 million in 2007, from $421.8 million in 2006, but decreasedas a percentage of revenue to 46.5 percent from 48.4 percent. The decrease inpayroll and related expenses as a percentage of revenue was primarily due tothe effective management of labor, as well as the $7.1 million of stock-basedcompensation expense recorded in 2006 related to the adoption of FASB Statementof Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” and the acceleration of the vesting of all outstanding unvested stockoptions and restricted stock units in connection with the Transaction. Includedin ARM’s payroll and related expenses was $532,000 of intercompany expense toCRM, for services provided to ARM.

 

CRM’s payroll and related expenses increased $43.1million to $246.7 million in 2007, from $203.6 million in 2006, but decreasedas a percentage of revenue to 75.1 percent from 81.0 percent. The decrease inpayroll and related expenses as a percentage of revenue was primarilyattributable to the increased revenue from the ramp up of the new contractsimplemented during 2007, as well as the absorption of the fixed payroll costsof the higher revenue base.

 

Portfolio Management’s payroll and related expensesdecreased $457,000 to $7.6 million in 2007, from $8.1 million in 2006, butincreased as a percentage of revenue to 5.0 percent from 4.9 percent. PortfolioManagement outsources all of the collection services to ARM and, therefore, hasa relatively small fixed payroll cost structure. The increase in payroll andrelated expenses as a 

 

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percentage of revenue was due principally to thedecrease in revenue resulting from the impairment charge in 2007.

 

***Selling, generaland administrative expenses.***  Selling, general and administrative expensesincreased $33.9 million to $459.2 million in 2007, from $425.3 million in 2006,and increased slightly as a percentage of revenue to 35.7 percent from 35.6percent.

 

ARM’s selling, general and administrative expensesincreased $30.0 million to $401.2 million in 2007, from $371.2 million in 2006,and increased slightly as a percentage of revenue to 43.8 percent from 42.6percent. The increase in selling, general and administrative expenses as apercentage of revenue was primarily attributable to leveraging ourinfrastructure over a lower revenue base. Included in ARM’s selling, generaland administrative expenses for 2006 were charges of $5.1 million related tothe Transaction as well as charges of $2.9 million related to the integrationof the acquisition of Risk Management Alternatives Parent Corp., referred to asRMA in September 2005.

 

CRM’s selling, general and administrative expensesincreased $9.6 million to $54.3 million in 2007, from $44.7 million in 2006,but decreased as a percentage of revenue to 16.5 percent from 17.8 percent. Thedecrease in selling, general and administrative expenses as a percentage ofrevenue was primarily attributable to the higher revenue base allowing for abetter leverage of our infrastructure in this division.

 

Portfolio Management’s selling, general andadministrative expenses decreased $10.3 million to $112.7 million in 2007, from$123.0 million in 2006, and increased as a percentage of revenue, not includingrevenue from the sales of portfolios, to 86.8 percent from 74.9 percent. Thedecrease in selling, general and administrative expenses was due primarily to a$4.6 million decrease in fees for collection services provided by ARM. Theincrease as a percentage of revenue was mainly attributable to the decrease inrevenue resulting from the impairment charge in 2007.  Included in Portfolio Management’s selling,general and administrative expenses for 2007 was $109.1 million of intercompanyexpense to ARM, for services provided to Portfolio Management.

 

***Restructuringcharges.***  During2006, we incurred restructuring charges of $12.8 million related to therestructuring of our legacy operations to streamline our cost structure, inconjunction with the acquisition of Risk Management Alternatives Parent Corp.The charges consisted primarily of costs associated with the closing ofredundant facilities and severance.

 

***Depreciation andamortization.*** Depreciation and amortization increased to $102.3 million in 2007, from$58.9 million in 2006. This increase was primarily attributable to theamortization of the customer relationships acquired in connection with theTransaction in November of 2006, as well as higher depreciation onadditions to property and equipment during 2007.

 

***Impairment ofintangible assets.*** During December 2006, SST performed a valuation of goodwill usingthe discounted cash flow method and determined that the entire $69.9 million ofgoodwill should be impaired.

 

***Otherincome (expense).***  Interestexpense increased to $95.3 million for 2007, from $41.6 million for 2006. Thisincrease was due primarily to the $830.0 million of debt incurred in connectionwith the Transaction and higher interest rates associated with that debt. Otherincome (expense) for 2007 included approximately $2.2 million of net gains fromthe settlement of certain foreign exchange contracts. Other income (expense)for 2006 included $2.3 million in insurance proceeds related to the effects ofHurricane Katrina on our business and approximant 

 

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$566,000 of net gains resulting from the settlement ofcertain foreign businesses which are not subject to income tax.

 

***Income taxes.***  For the year ended December 31, 2007,income tax benefit was $16.1 million compared to income tax expense of $11.2million for 2006. The income tax benefit for 2007 resulted from losses in thedomestic ARM and CRM businesses combined with income from certain foreignbusinesses which are not subject to income tax.

 

**Liquidityand Capital Resources**

 

Our primary sources of cash have been cash flows fromoperations, including collections on purchased accounts receivable, bankborrowings, nonrecourse borrowings, and equity and debt offerings. Cash hasbeen used for acquisitions, repayments of bank borrowings, purchases ofequipment, purchases of accounts receivable, and working capital to support ourgrowth.

 

The cash flow from our contingency collection businessand our purchased portfolio business is dependent upon our ability to collectfrom consumers and businesses. Many factors, including the economy and ourability to hire and retain qualified collectors and managers, are essential toour ability to generate cash flows. Fluctuations in these factors that cause anegative impact on our business could have a material impact on our expectedfuture cash flows.

 

The capital and credit markets have recentlyexperienced significant volatility and if this continues, it is possible thatour ability to access the capital and credit markets may be limited. Currently,our senior notes and senior subordinated notes are assigned ratings by certainrating agencies. Changes in our business environment, operating results, cashflows, or financial position could impact the ratings assigned by these ratingagencies. Such significant volatility could also significantly affect the costsof borrowing, which could have a material impact on our financial condition andresults of operations. We are currently in compliance with all of our debtcovenants, but the future impact on the Company’s operations and financialprojections from the challenging economic and business environment may impactour ability to meet our debt covenants in the future.

 

In 2008, our nonrecourse lender significantlycurtailed their participation in our purchased accounts receivable business. Wefunded our purchases with available cash and borrowings under our revolvingcredit facility. In addition, acquisitions of businesses and earn-out paymentson previously acquired businesses were a significant use of cash andavailability on the revolving credit facility in 2008. We had $193,000 and $35.0million available for borrowing under our revolving credit facility at December 31,2008 and March 25, 2009, respectively. The increase in our availabilitywas attributable to $22.5 million of proceeds from equity issued in connectionwith the amendment to our senior credit facility, which is discussed below, thatwas used to pay down our revolving credit facility, $11.5 million of repaymentsfrom cash flows from operations and $760,000 of reductions in letters ofcredit.

 

Notwithstanding the foregoing, at this time, webelieve that we will be able to finance our current operations, planned capitalexpenditure requirements, internal growth and debt service obligations, atleast through the next twelve months, with the funds generated from ouroperations, with our existing cash and available borrowings under our CreditFacility (as defined below) and nonrecourse credit facility. Additionally, wehave the ability to obtain cash through additional equity and debt offerings,if needed.

 

We have a senior credit facility, referred to as theCredit Facility, that consists of a term loan ($588.6 million outstanding as ofDecember 31, 2008) and a $100.0 million revolving credit 

 

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facility ($81.5 million outstanding as of December 31,2008). Additionally, we have $165.0 million of floating rate senior notes and$200.0 million 11.875 percent senior subordinated notes. As a result, we aresignificantly leveraged.

 

Due to the expected impact of the deterioratingeconomic conditions on our 2009 financial results, as well as financialcovenant ratio adjustments required under the Credit Facility in 2009,management became uncertain of its ability to remain in compliance with thefinancial covenants throughout 2009. Therefore, on March 25, 2009, weamended the Credit Facility to, among other things: (i) adjust thefinancial covenants, including increasing maximum leverage ratios, decreasingminimum interest coverage ratios, and increasing maximum capital expenditures; (ii) increasethe margin applicable to Base Rate (defined as the higher of the prime rate orthe federal funds rate) borrowings and LIBOR borrowings by 0.75 percent; (iii) createa minimum LIBOR of 2.50 percent; (iv) create a minimum Base Rate of LIBORplus 1.00 percent; (v) increase the letter-of-credit subfacility to $30.0million; (vi) permit us under certain circumstances to increase the sizeof our revolving credit facility by up to $50.0 million in the aggregate; and (vii) limitour ability to invest in purchased accounts receivable under certaincircumstances.

 

The amendment to the Credit Facility also permits usto repurchase our senior notes and senior subordinated notes out of the netcash proceeds of new equity issuances. We are aware that our senior notesand senior subordinated notes are currently trading at a substantial discountto their face amounts. We or our stockholders may from time to time seekto retire or purchase our outstanding notes through cash purchases and/orexchanges for equity securities, in open market purchases, privately negotiatedtransactions or otherwise. Our stockholders who acquire such notes mayseek to contribute them to us, for retirement, in exchange for the issuance ofadditional equity. The amounts involved may be material.

 

On March 25, 2009, in connection with theamendment discussed above, we privately placed 147,447.3 shares of our Series B-1Preferred Stock and 20,973.7 shares of our Series B-2 Preferred Stock toOne Equity Partners, Michael J. Barrist and certain members of executivemanagement, and other co-investors for an aggregate purchase price of $40.0million. The proceeds were used to pay down $15.0 million of term loanborrowings, and the remainder, net of expenses, of $22.5 million was used torepay borrowings under our revolving credit facility.

 

In December 2008, we privately placed 40,746shares of our Series B-1 Preferred Stock and 1,369 shares of our Series B-2Preferred Stock for an aggregate purchase price of $10.0 million. The proceeds wereused for general corporate purposes.

 

In February 2008, we privately placed 802,262shares of Series A Preferred Stock, 33,338 shares of Class L common stockand 1,011,162 shares of Class A common stock for an aggregate purchaseprice of $210.0 million. The entire amount of proceeds was used to acquire OSI.We amended the senior credit facility in connection with the OSI acquisitionto, among other things, add $139.0 million to the term loan. The entire amountof this term loan was used to fund the remainder of the purchase price toacquire OSI.

 

In January 2008, we issued 22,484 shares of SeriesA Preferred Stock for merger consideration in connection with the acquisitionof SST, and an additional 7,400 shares in February 2009.

 

The exclusivity agreement with our nonrecourse lenderexpires on June 30, 2009. We have begun to discuss future lendingfacilities for the purchases of accounts receivable with the existing lenderand other third-party lenders. Such future borrowings, if any, may reduce ouruse of available cash or borrowings under our revolving credit facility.

 

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***Cash Flows fromOperating Activities.*** Cash provided by operating activities was $93.7 million in 2008,compared to $44.0 million in 2007. The increase in cash provided by operatingactivities was primarily attributable to the operating activities of OSI, whichwas acquired on February 29, 2008, and a decrease in accounts receivable,trade of $11.8 million for 2008, compared to an increase of $28.6 million inthe prior year, resulting from the collection of a large outstanding receivablebalance during 2008. These increases were partially offset by a decrease inaccounts payable and accrued expenses of $23.2 million for 2008, compared to anincrease of $3.4 million in the prior year.

 

Cash provided byoperating activities was $44.0 million in 2007, compared to $104.7 million in2006. The decrease in cash provided by operating activities was primarilyattributable to a $14.6 million decrease in income taxes payable in 2007,compared to a $24.2 million increase in the prior year, and an increase of$28.6 million in accounts receivable trade in 2007, compared to an increase of$1.9 million in the prior year.

 

***Cash Flows fromInvesting Activities.*** Cash used in investing activities was $424.2 million in 2008 compared to$32.7 million in 2007. The increase in cash used in investing activities wasprimarily attributable to cash paid for acquisitions and acquisition-relatedcosts of $349.4 million in 2008 primarily incurred in connection with theacquisition of OSI on February 29, 2008.

 

Cash used in investing activities was $32.7 million in2007, compared to $1,006.3 million in 2006. The decrease in cash used ininvesting activities was primarily attributable to cash paid for acquisitionsand acquisition-related costs of $983.2 million in 2006 primarily incurred inconnection with the Transaction and the acquisition of Star Contact. Alsocontributing to the decrease was lower purchases of property and equipmentduring 2007, offset in part by higher purchases of accounts receivableportfolios.

 

***Cash Flows fromFinancing Activities.*** Cash provided by financing activities was $332.2 million in 2008,compared to cash used in financing activities of $2.9 million in 2007. Thechange in financing activities resulted from the additional borrowings of$139.0 million under our Credit Facility and the issuance of $210.0 million ofstock, both of which were used primarily to fund the OSI acquisition. During2008, we paid $17.5 million to JPM in connection with the acquisition of SST,which was deemed to be a cash dividend for accounting purposes.

 

Cash used infinancing activities was $2.9 million in 2007, compared to cash provided byfinancing activities of $914.9 million in 2006. The change in financingactivities resulted from the 2006 borrowings of $830.0 million to fund theTransaction, consisting of $465.0 million term loan under the Credit Facility,$165.0 million of senior notes and $200.0 million of senior subordinated notes.Also, contributing to the change was the 2006 issuance of $396.0 million ofcapital stock in connection with the Transaction. Partially offsetting theseitems was net borrowings under the Credit Facility of $6.4 million in 2007,compared to net repayments of $134.5 million in 2006.

 

***Senior Credit Facility.***  On November 15, 2006 we entered into theCredit Facility with a syndicate of financial institutions. The CreditFacility, as amended, consists of a term loan ($588.6 million outstanding as ofDecember 31, 2008) and a $100.0 million revolving credit facility ($81.5million outstanding as of December 31, 2008). We are required to makequarterly repayments of $1.5 million on the term loan until its maturity in May 2013,at which its remaining balance outstanding is due. We are also required to makeannual prepayments of 50 percent, 25 percent or zero percent of our excessannual cash flow, based on our leverage ratio. The revolving credit facilityrequires no minimum principal payments until its maturity date of November 2011.The availability of the revolving credit facility is reduced by any unusedletters of credit ($18.3 million at December 31, 2008). We had $193,000and $35.0 million available for borrowing under our revolving credit facilityat December 31, 2008 and March 25, 2009, respectively.

 

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Borrowings under theCredit Facility are collateralized by substantially all of our assets. TheCredit Facility contains certain financial and other covenants such asmaintaining a maximum leverage ratio and a minimum interest coverage ratio, andincludes restrictions on, among other things, acquisitions, the incurrence of additionaldebt, investments, disposition of assets, liens and dividends and otherdistributions. If an event of default, such as failure to comply with covenantsor a change of control, were to occur under the Credit Facility, the lenderswould be entitled to declare all amounts outstanding under it immediately dueand payable and foreclose on the pledged assets. At December 31, 2008, ourleverage ratio was 4.18, compared to the maximum of 4.75, and our interestcoverage ratio was 2.94, compared to the minimum of 2.10. We were in compliancewith all required financial covenants and we were not aware of any events ofdefault as of December 31, 2008.

 

Due to the expected impact of the deterioratingeconomic conditions on our 2009 financial results, as well as financialcovenant ratio adjustments required under the Credit Facility in 2009,management became uncertain of its ability to remain in compliance with thefinancial covenants through 2009. Therefore, on March 25, 2009, we amendedthe Credit Facility to, among other things: (i) adjust the financialcovenants, including increasing maximum leverage ratios, decreasing minimuminterest coverage ratios, and increasing maximum capital expenditures; (ii) increasethe margin applicable to Base Rate (defined as the higher of the prime rate orthe federal funds rate) borrowings and LIBOR borrowings by 0.75 percent; (iii) createa minimum LIBOR of 2.50 percent; (iv) create a minimum Base Rate of LIBORplus 1.00 percent; (v) increase the letter-of-credit subfacility to $30.0million; (vi) permit us under certain circumstances to increase the sizeof our revolving credit facility by up to $50.0 million in the aggregate; and (vii) limitour ability to invest in purchased accounts receivable under certaincircumstances. Following the amendment and after giving effect to the repaymentof certain amounts owed under the Credit Agreement with the proceeds of theequity sale described below, as of March 25, 2009 the balance outstandingon the term loan was $573.6 million and the balance outstanding on therevolving credit facility was $47.5 million. We had $35.0 million of remainingavailability under the revolving credit facility as of March 25, 2009.

 

On March 25, 2009, in connection with theamendment discussed above, we privately placed 147,447.3 shares of our Series B-1Preferred Stock and 20,973.7 shares of our Series B-2 Preferred Stock toOne Equity Partners, Michael J. Barrist and certain members of executivemanagement, and other co-investors for an aggregate purchase price of $40.0million. The proceeds were used to pay down $15.0 million of term loanborrowings, and the remainder, net of expenses, of $22.5 million was used torepay borrowings under our revolving credit facility.

 

***Senior Notes and Senior Subordinated Notes.***  In connection with the Transaction, on November 15,2006 we issued $165.0 million of floating rate senior notes due 2013, referredto as the Senior Notes, and $200.0 million of 11.875 percent seniorsubordinated notes due 2014, referred to as the Senior Subordinated Notes,collectively referred to as the Notes. The Notes are guaranteed, jointly andseverally, on a senior basis with respect to the Senior Notes and on a seniorsubordinated basis with respect to the Senior Subordinated Notes, in each caseby all of our existing and future domestic restricted subsidiaries (other thancertain subsidiaries and joint ventures engaged in financing the purchase ofdelinquent accounts receivable portfolios and certain immaterial subsidiaries).

 

The Senior Notes areunsecured senior obligations and are senior in right of payment to all existingand future senior subordinated indebtedness, including the Senior SubordinatedNotes, and all future subordinated indebtedness. The Senior Notes bear interestat an annual rate equal to the 

 

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London Interbank OfferedRate, referred to as LIBOR, plus 4.875 percent, reset quarterly. We may redeemthe Senior Notes, in whole or in part, at varying redemption prices dependingon the redemption date, plus accrued and unpaid interest.

 

The SeniorSubordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future seniorindebtedness, including the Senior Notes and borrowings under the CreditFacility. We may redeem the Senior Subordinated Notes, in whole or in part, atany time on or after November 15, 2010 at varying redemption pricesdepending on the redemption date, plus accrued and unpaid interest. We also mayredeem some or all of the Senior Subordinated Notes at any time prior to November 15,2010, at a redemption price equal to 100 percent of the principal amount of therespective Notes to be redeemed, plus accrued and unpaid interest and anadditional premium. Finally, subject to certain conditions, we may redeem up to35 percent of the aggregate principal amount of the Senior Subordinated Notesat any time prior to November 15, 2009 with the net proceeds of a sale ofour capital stock at a redemption price equal to 100 percent of the principalamount of the respective Notes to be redeemed, plus accrued and unpaid interestand an additional premium.

 

The indenturesgoverning the Notes contain a number of covenants that limit our and ourrestricted subsidiaries’ ability, among other things, to: incur additionalindebtedness and issue certain preferred stock, pay certain dividends, acquireshares of capital stock, make payments on subordinated debt or makeinvestments, place limitations on distributions from restricted subsidiaries,issue or sell stock of restricted subsidiaries, guarantee indebtedness, sell orexchange assets, enter into transactions with affiliates, create certain liens,engage in unrelated businesses, and consolidate, merge or transfer all orsubstantially all of our assets and the assets of our subsidiaries on aconsolidated basis. In addition, upon a change of control, we are required tooffer to repurchase all of the Notes then outstanding, at a purchase priceequal to 101 percent of their principal amount, plus any accrued interest tothe date of repurchase.

 

Upon certainevents of default, the trustee or the holders of at least 25 percent in theaggregate principal amount of the notes, then outstanding, may, and the trusteeat the request of the holders will, declare the principal of, premium, if any,and accrued interest on the notes to be immediately due and payable. In theevent a court enters a decree or order for relief against us in an involuntarycase under any applicable bankruptcy, insolvency or other similar law now orhereafter in effect, the court appoints a receiver, liquidator, assignee,custodian, trustee, sequestrator or similar official or for all orsubstantially all of our property and assets or the winding up or liquidationof our affairs and, in each case, such decree or order remains unstayed and ineffect for a period of 60 consecutive days, the principal of, premium, if any,and accrued interest on the notes then outstanding will automatically becomeand be immediately due and payable. Additionally, if we or any subsidiaryguarantor commence a voluntary case under any applicable bankruptcy, insolvencyor other similar law now or hereafter in effect, or consent to the entry of anorder for relief in an involuntary case under any such law, consent to theappointment of or taking possession by a receiver, liquidator, assignee,custodian, trustee, sequestrator or similar official or for all orsubstantially all of our property and assets or substantially all of theproperty and assets of a significant subsidiary (as defined in the indentures)or effect any general assignment for the benefit of creditors, the principalof, premium, if any, and accrued interest on the notes then outstanding willautomatically become and be immediately due and payable.

 

***Nonrecourse Credit Facility.***  We have a nonrecourse credit facility and anexclusivity agreement, collectively referred to as the Nonrecourse Agreement.The Nonrecourse Agreement provides that all purchases of accounts receivable byus with a purchase price in excess of $1.0 million are first offered to thelender for financing at its discretion. If the lender chooses to 

 

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participate in thefinancing of a portfolio of accounts receivable, the financing may bestructured, depending on the size and nature of the portfolio to be purchased,either as a borrowing arrangement or under various equity sharing arrangements.The lender will finance non-equity borrowings with floating interest at anannual rate equal to LIBOR plus 2.50 percent, or as negotiated. Theseborrowings are nonrecourse to us and are due two years from the date of eachrespective loan, unless otherwise negotiated. As additional return on the debtfinanced portfolios, the lender receives residual cash flows, as negotiated,which is defined as all cash collections after servicing fees, floating rateinterest, repayment of the borrowing, and our initial investment, includinginterest. We may terminate the Nonrecourse Agreement for a cost of $250,000 foreach month remaining under the Nonrecourse Agreement from the date oftermination until June 30, 2009, when the Nonrecourse Agreement expires.Total debt outstanding under this facility as of December 31, 2008 was$37.2 million, including $3.7 million of accrued residual interest. As of December 31,2008, we were in compliance with all required covenants.

 

Borrowings underthe amended credit facility are nonrecourse to us, except for the assets withinthe entities established in connection with the financing agreement. This loanagreement contains a collections performance requirement, among othercovenants, that, if not met, provides for cross-collateralization with anyother portfolios financed through the agreement, in addition to other remedies.

 

The exclusivityagreement to the Nonrecourse Agreement expires on June 30, 2009. We havebegun to discuss future lending facilities for the purchases of accountsreceivable with the existing lender and other third-party lenders. Such futureborrowings, if any, may reduce our use of available cash or borrowings underour revolving credit facility.

 

***Contractual Obligations.***  The following summarizes our contractualobligations as of December 31, 2008 (amounts in thousands). For a detaileddiscussion of these contractual obligations, see notes 11, 12 and 19 in ourNotes to Consolidated Financial Statements.

 
| ** **                      | ** ** | **Payments Due by Period(1)** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                    | ** ** | **Less than  1 Year** | ** ** | **1 to 3  Years** | ** ** | **3 to 5  Years** | ** ** | **More than  5 Years** | ** ** |
|                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Credit Facility                 |       | $                                            | 670,105    |   | $ | 6,054 |   | $ | 93,608 |   | $ | 570,443 |   | $ | — |   |
| Notes                           |       | 365,000                                      |       | — |   | — |   | 165,000 |   | 200,000 |   |
| Nonrecourse  credit facility    |       | 37,244                                       |       | 22,845 |   | 14,007 |   | 392 |   | — |   |
| Other long-term  debt           |       | 6,729                                        |       | 1,660 |   | 1,170 |   | 964 |   | 2,935 |   |
| Estimated  interest payments(2) |       | 393,078                                      |       | 84,687 |   | 163,622 |   | 123,988 |   | 20,781 |   |
| Operating leases  (3)           |       | 245,781                                      |       | 59,109 |   | 88,646 |   | 54,999 |   | 43,027 |   |
| Purchase  commitments           |       | 79,049                                       |       | 33,867 |   | 45,182 |   | — |   | — |   |
| Forward-flow  agreements        |       | 45,245                                       |       | 28,966 |   | 15,379 |   | 900 |   | — |   |
|                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Total  contractual obligations  |       | $                                            | 1,842,231  |   | $ | 237,188 |   | $ | 421,614 |   | $ | 916,686 |   | $ | 266,743 |   |

 

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(1)                        Does notinclude deferred income taxes since the timing of payment is not certain (seenote 12 in our Notes to Consolidated Financial Statements). Payments of debtassume no prepayments.

(2)                        Representsestimated future interest expense based on applicable rates, including minimumrates as defined in our amended senior credit facility.

(3)                        Does notinclude the leases from our former Fort Washington locations (see note 19 inour Notes to Consolidated Financial Statements).

 

Because theirfuture cash outflows are uncertain, noncurrent liabilities for income taxcontingencies are excluded from the table above. As discussed in Note 2 in ourNotes to Consolidated Financial Statements, we adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,”referred to as FIN 48, on January 1, 2007. At December 31, 2008, wehad approximately $8.3 million in reserves for uncertain tax positions 

 

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and an accrual forrelated interest expense of $4.0 million. Currently, we do not estimate a cashsettlement with the applicable taxing authority will occur within 12 months forthe majority of these unrecognized tax benefits.

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheet arrangements as defined byRegulation S-K 303(a)(4) of the Securities Exchange Act of 1934.

 

**MarketRisk**

 

We are exposed to various types of market risk in the normal course ofbusiness, including the impact of interest rate changes, foreign currencyexchange rate fluctuations, changes in corporate tax rates, and inflation. Weemploy risk management strategies that may include the use of derivatives, suchas interest rate swap agreements, interest rate cap agreements, and foreigncurrency forwards and options to manage these exposures. We do not enter intoderivatives for trading purposes.

 

***Foreign Currency Risk.*** Foreigncurrency exposures arise from transactions denominated in a currency other thanthe functional currency and from foreign denominated revenue and profittranslated into U.S. dollars. The primary currencies to which we are exposedinclude the Canadian dollar, the Philippine peso, the British pound and theAustralian dollar. Due to the size of the Canadian and Philippine operations,we currently use forward exchange contracts to limit potential losses inearnings or cash flows from adverse foreign currency exchange rate movements.These contracts are entered into to protect against the risk that the eventualcash flows resulting from such contracts will be adversely affected by changesin exchange rates. Our objective is to maintain economically balanced currencyrisk management strategies that provide adequate downside protection. Duringthe year ended December 31, 2008, we continued to see volatility of theU.S. dollar, primarily as it relates to the Canadian dollar and the Philippinepeso. We believe this trend may continue, and if so, it could have a negativeimpact on our future results of operations.

 

***Interest Rate Risk.* **AtDecember 31, 2008, we had $872.3 million in outstanding variable rateborrowings. A material change in interest rates could adversely affect ouroperating results and cash flows. A 25 basis-point increase in interest ratescould increase our annual interest expense by $125,000 for each $50 million ofvariable debt outstanding for the entire year. We currently use interest rateswap agreements and interest rate cap agreements in an effort to limitpotential losses from adverse interest rate changes.

 

**Impact ofRecently Issued and Proposed Accounting Pronouncements**

 

***FASB Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations.” ***In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141 (revised 2007), “Business Combinations,”referred to as SFAS 141(R), which replaces FASB Statement of FinancialAccounting Standards No. 141, “Business Combinations,” referred to as SFAS141.  While SFAS 141(R) retains thefundamental requirements of SFAS 141 to use the purchase method foracquisitions, it broadens the scope to apply this method to all transactions inwhich one entity obtains control over one or more other businesses. Among otherthings, SFAS 141(R) requires that acquired businesses be recognized attheir fair values at the date of acquisition, acquisition-related costs to berecognized separately from the acquisition, contingent assets and liabilitiesto be recognized at fair value at the date of acquisition and restructuringcosts 

 

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ofthe acquirer to be recognized separately from the acquisition. SFAS 141 (R) iseffective for us on January 1, 2009. We are currently reviewing thestandard to assess the impact of the adoption of SFAS 141(R).

 

***FASB Statement of Financial Accounting Standards No. 160,“Noncontrolling Interests in Consolidated Financial Statements – an amendmentof ARB No. 51.”***  In December 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51,”referred to as SFAS 160. This statement establishes accounting and reportingstandards that require a noncontrolling interest, or minority interest, in asubsidiary to be presented in the equity section of the consolidated balancesheet, net income attributable to the parent and to the noncontrolling interestto be presented on the consolidated statement of income and sufficientdisclosures to clearly distinguish between the interests of the parent and thenoncontrolling interest, among other requirements. SFAS 160 is effective for uson January 1, 2009. We are currently reviewing the standard to assess theimpact of the adoption of SFAS 160.

 

***FASB Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities– an amendmentof FASB Statement No. 133.”***  In March 2008,the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133,” referred to as SFAS 161. This statement requiresenhanced disclosures for derivative instruments and hedging activities thatinclude how and why an entity uses derivatives, how these instruments and therelated hedged items are accounted for under SFAS 133 and relatedinterpretations, and how derivative instruments and related hedged items affectthe entity’s financial position, results of operations and cash flows. SFAS 161is effective for us on January 1, 2009. We are currently reviewing thestandard to assess the impact of the adoption of SFAS 161.

 

***FASB Staff Position 142-3, “Determination of the Useful Lifeof Intangible Assets.”***In April 2008, the FASB issued StaffPosition 142-3, “Determination of the Useful Life of Intangible Assets,” referredto as FSP 142-3. FSP 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS No. 142, “Goodwill and OtherIntangible Assets”. FSP 142-3 is effective for us on January 1, 2009. Weare currently reviewing FSP 142-3 to assess the impact of adoption.

 

**Item 7A.       Quantitative and QualitativeDisclosures about Market Risk**

 

Disclosure regarding this item isincluded in Item 7, Management’s Discussion and Analysis of Financial Conditionand Results of Operations, under the heading of “Market Risk,” of this Reporton Form 10-K and note 15 in our Notes to Consolidated Financial Statementsincluded elsewhere in this Report on Form 10-K.

 

**Item 8.          Financial Statements andSupplementary Data**

 

The financialstatements, financial statement schedules and related documents that are filedwith this Report are listed in Item 15 of this Report on Form 10-K andbegin on page F-1.

 

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**Item 9.****                              Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

On February 2,2007, the Audit Committee of our Board of Directors determined that Ernst &Young LLP would be dismissed as the independent registered public accountingfirm for the Company, effective upon completion by Ernst & Young LLPof its services related to their audit of the consolidated financial statementsas of December 31, 2006.

 

Ernst &Young LLP’s reports on the consolidated financial statements of NCO Group, Inc.(formerly known as Collect Holdings, Inc.) at December 31, 2006 andfor the period July 13, 2006 (date of inception) to December 31, 2006(Successor Period) and the consolidated financial statements of NCO Group, Inc.(as predecessor to Collect Holdings, Inc.) at December 31, 2005 andfor the years ended December 31, 2005 and 2004 and for the period from January 1,2006 to November 15, 2006 (collectively the Predecessor Period) did notcontain any adverse opinion or a disclaimer of opinion, nor were such reportsqualified or modified as to uncertainty, audit scope or principle. During theSuccessor and Predecessor Periods and through May 8, 2007 (date ofcompletion of Ernst & Young LLP’s procedures related to their audit ofthe consolidated financial statements as of December 31, 2006), there wereno disagreements with Ernst & Young LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, that if not resolved to the satisfaction of Ernst & YoungLLP, would have caused Ernst & Young LLP to make reference to thematter in its reports on the consolidated financial statements of the Companyfor such periods. Pursuant to the AICPA’s Statement of Auditing Standards No. 112“Communicating Internal Control Related Matters Identified in an Audit,” forthe Predecessor Period ended November 15, 2006, Ernst & Young LLPissued a letter informing management of a deficiency in internal control thatthey consider to be a material weakness, related to the operating effectivenessof the Company’s income tax and financial statement close processes. Other thanthe material weakness identified by Ernst & Young LLP related to theincome tax and financial statement close processes, there have been no “reportableevents” as defined in Item 304(a)(1)(v) of Regulation S-K.

 

The Companyengaged PricewaterhouseCoopers LLP as its new independent registered publicaccounting firm as of February 2, 2007. During the two most recent fiscalyears and through February 2, 2007, the Company has not consulted withPricewaterhouseCoopers LLP regarding either (i) the application ofaccounting principles to a specified transaction, either completed or proposed;or the type of audit opinion that might be rendered on the Company’s financialstatements, and neither a written report was provided to the Company or oraladvice was provided that PricewaterhouseCoopers LLP concluded was an importantfactor considered by the Company in reaching a decision as to the accounting,auditing or financial reporting issue; or (ii) any matter that was eitherthe subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) ofRegulation S-K and the related instructions to Item 304 of Regulation S-K, or areportable event, as that term is defined in Item 304(a)(1)(v) ofRegulation S-K.

 

**Item9A(T).  Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management,with the participation of our chief executive officer and chief financialofficer, conducted an evaluation of the effectiveness of our disclosurecontrols and procedures, as defined in Exchange Act Rules 13a-15(e) and15d-15(e), as of December 31, 2008. Based on that evaluation, our chiefexecutive officer and chief financial officer concluded that, as of the end ofthe period covered by this Report, our disclosure controls and procedures wereeffective as of 

 

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December 31, 2008,in reaching a reasonable level of assurance that (i) information requiredto be disclosed by the Company in the reports that it files or submits underthe Act is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms and (ii) informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Act is accumulated and communicated to the Company’s management,including its principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

**Remediationof Prior Material Weakness in Internal Control over Financial Reporting**

 

As previouslydisclosed, as of December 31, 2007, our control procedures did not includeadequate review over the completeness and accuracy of our income tax accountsto ensure compliance with generally accepted accounting principles (“GAAP”). Beginningin 2007, we out-sourced the preparation of the income tax provision to a thirdparty and did not apply a sufficient review of the third party’s documentationto determine the accuracy and completeness of such provision. Thisdeficiency resulted in material errors in our preliminary income tax provisionin our 2007 consolidated financial statements. Our management determinedthat this control deficiency constituted a material weakness as of December 31,2007. We corrected the provision for income taxes and related balances prior tothe issuance of the 2007 consolidated financial statements. Accordingly,the 2007 consolidated financial statements reflected the corrected provisionfor income taxes and related balances. To remediate this material weakness, ourmanagement implemented review controls to ensure the accuracy and completenessof the provision for income taxes and related balances in the future.

 

In response to theidentified material weakness, our management, with oversight from our AuditCommittee, implemented a plan of remediation. The remediation plan wasdeveloped following an investigation and review of the processes and activitiessurrounding the material weakness and included changes to these processes toprevent or detect similar future occurrences. As a result of this plan, we madethe following control improvements during the fourth quarter of 2008:

 

·      Wehired tax professionals who have significant tax accounting and reportingexperience;

·      We implemented new systemsto assist in the preparation of the income tax provision; and

·      We enhanced processes andcontrols related to income tax accounting and reporting.

 

**Changesto Internal Control over Financial Reporting During the Quarter Ended December 31,2008**

 

Our management,with the participation of our chief executive officer and chief financialofficer, conducted an evaluation of our internal control over financialreporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f),to determine whether any changes occurred during the quarter ended December 31,2008, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. Based on thatevaluation, the changes discussed above were made during the quarter ended December 31,2008 in order to remediate the material weakness described above. Theseremediation steps were developed following investigation and review of theprocesses and activities surrounding the material weakness and include changesto these processes to prevent or detect similar future occurrences.

 

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**Management’sAnnual Report on Internal Control over Financial Reporting**

 

Management of NCOGroup, Inc. is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rule 15d-15(f).

 

Our management,with the participation of our chief executive officer and chief financialofficer, conducted an assessment as of December 31, 2008, of theeffectiveness of the Company’s internal control over financial reporting, usingthe framework established in Internal Control – Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment, our management concluded that, as of December 31,2008, the Company’s internal control over financial reporting was effective toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles.

 

In January 2008,we acquired Systems & Services Technologies, Inc. (“SST”) and in February 2008,we acquired Outsourcing Solutions, Inc. (“OSI”). Pursuant to guidanceissued by the Securities and Exchange Commission, our management has excludedthe internal controls over financial reporting associated with theseacquisitions from its assessment of the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2008. SST and OSIcollectively represented approximately 26.2% of our total assets andapproximately 26.5% of our total revenues as of and for the year ended December 31,2008.

 

Because of theinherent limitations in all controls systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within our company have been or will be detected. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

This report on Form 10-Kdoes not include an attestation report of the Company’s independent registeredpublic accounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by the Company’s independentregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this report on Form 10-K.

 

**InherentLimitations on Effectiveness of Controls**

 

A control system,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all controls systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within our company have been detected. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

 

**Item 9B.       Other Information**

 

None.

 

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**PART III**

 

**Item 10.****                            Directors,Executive Officers and Corporate Governance**

 

Set forth below isinformation concerning our directors and executive officers.

 
| **Name**                  | ** ** | **Age(1)** | ** ** | **Position**                                                                    |
|---------------------------|------------|------------|------------|---------------------------------------------------------------------------------|
| Michael J. Barrist        |       | 48         |       | Chairman of the  Board(2), President and Chief Executive Officer                |
|                      |       |       |       |                                                                            |
| Stephen W. Elliott        |       | 47         |       | Executive Vice  President, Information Technology and Chief Information Officer |
|                      |       |       |       |                                                                            |
| Joshua  Gindin, Esq. |       | 52         |       | Executive Vice  President and General Counsel                                   |
|                      |       |       |       |                                                                            |
| Steven Leckerman          |       | 56         |       | Executive Vice  President and Chief Operating Officer                           |
|                      |       |       |       |                                                                            |
| John R. Schwab            |       | 41         |       | Executive Vice  President, Finance, Chief Financial Officer and Treasurer       |
|                      |       |       |       |                                                                            |
| Albert Zezulinski         |       | 62         |       | Executive Vice  President, Marketing and Administrative Operations              |
|                      |       |       |       |                                                                            |
| Austin A. Adams           |       | 66         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Henry H. Briance          |       | 24         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| David M. Cohen            |       | 47         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Colin M. Farmer           |       | 35         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Edward A. Kangas          |       | 64         |       | Director(2)                                                                     |
|                      |       |       |       |                                                                            |
| Leo J. Pound              |       | 54         |       | Director(2)                                                                     |

 

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(1) As of March 31, 2009

(2) Each Director serves a term of one year and untilhis successor is duly elected and qualified

 

*MichaelJ. Barrist* — Mr. Barrist has served as our Chairman ofthe Board, President and Chief Executive Officer since purchasing the Companyin 1986. Mr. Barrist was employed by U.S. Healthcare, Inc., a managedhealthcare company, from 1984 to 1986, most recently as Vice President ofOperations, and was employed by Gross & Company, a certified publicaccounting firm, from 1980 through 1984. Mr. Barrist is a Certified PublicAccountant.

 

*StephenW. Elliott* — Mr. Elliott joined us in 1996 as SeniorVice President, Technology and Chief Information Officer after having providedconsulting services to us for the year prior to his arrival. Mr. Elliottbecame an Executive Vice President in February 1999. Prior to joining us, Mr. Elliottwas employed by Electronic Data Systems, a computer services company, foralmost 10 years, most recently as Senior Account Manager.

 

*JoshuaGindin, Esq.* — Mr. Gindin joined us in May 1998.Prior to joining us, Mr. Gindin was a partner in the law firm of Kessler &Gindin, which had served as our legal counsel since 

 

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1986.

 

*StevenLeckerman* — Mr. Leckerman joined us in 1995 as SeniorVice President, Collection Operations, became Executive Vice President, U.S.Operations in January 2001, in August 2003 became Executive VicePresident and Chief Operating Officer — Accounts Receivable Management, NorthAmerica and in November 2006, became Chief Operating Officer of GlobalServices. In November 2008, Mr. Leckerman became Executive VicePresident and Chief Operating Officer. From 1982 to 1995, Mr. Leckermanwas employed by Allied Bond Corporation, a collection company that was adivision of TransUnion Corporation, where he served as manager of dialer andspecial projects.

 

*JohnR. Schwab* — Mr. Schwab joined us as Senior VicePresident, Finance and Chief Accounting Officer, through the acquisition of RMHTeleservices, Inc. in April 2004, where he was the Chief FinancialOfficer since 2003. In May 2006, Mr. Schwab became Executive VicePresident, Finance, Chief Financial Officer and Treasurer. From 2000 to 2003, Mr. Schwabwas employed by Inrange Technologies, Inc., a data storage networkingcompany, most recently as the Chief Financial Officer. Prior to that, Mr. Schwabworked for Arthur Andersen for 11 years, most recently as Senior Manager in theGrowth Company Practice. Mr. Schwab is a Certified Public Accountant.

 

*AlbertZezulinski* — Mr. Zezulinski joined us in January 2001as Executive Vice President, Health Services, became Executive Vice President,Corporate and Government Affairs in May 2002, and in September 2005became Executive Vice President, Global Portfolio Operations. In November 2008,Mr. Zezulinski became Executive Vice President, Marketing andAdministrative Operations. Mr. Zezulinski has more than 30 years ofconsulting and healthcare experience. Prior to joining us, Mr. Zezulinskiwas the Director of Healthcare Financial Services for BDO Seidman, LLP, aninternational accounting and consulting firm.

 

*AustinA. Adams* — Mr. Adamswas the Corporate Chief Information Officer of JPMorgan Chase from July 2004,when JPMorgan Chase merged with Bank One Corporation, until his retirement in October 2006.Prior to the merger, Mr. Adams was Executive Vice President and Chief InformationOfficer of Bank One. Prior to joining Bank One in 2001, Mr. Adams wasChief Information Officer of First Union Corporation. Mr. Adams wasappointed to the Board of Directors in February 2007. Mr. Adams isalso a director of the Dun & Bradstreet Corporation and Spectra EnergyCorp.

 

*HenryH. Briance* — Mr. Brianceis a Vice President at One Equity Partners, which he joined in September 2006.Mr. Briance received a BA in Classics from the University of Cambridge in2005.

 

*DavidM. Cohen* — Mr. Cohenis a Managing Director of One Equity Partners. Prior to joining One EquityPartners in September 2007, Mr. Cohen acted as a Managing Directorand the Global Head of the Industrials Group at JPMorgan Securities from February 2004to July 2007 and prior to that served as Co-Head of the North AmericaM&A Group from March 2002 to February 2004. Before joiningJPMorgan, Mr. Cohen was Co-Head of the M&A Group of S.G. Warburg Inc.,and worked for Wasserstein Perella & Co. Inc. in both M&A and HighYield Financing. Mr. Cohen previously worked for Bain & Companyas a management consultant. Mr. Cohen is also a director of X-Rite,Incorporated.

 

*ColinM. Farmer* — Mr. Farmeris a Managing Director of One Equity Partners. Prior to joining One EquityPartners in October 2006, Mr. Farmer spent eight years at HarvestPartners, 

 

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amiddle-market private equity firm. Prior to that, Mr. Farmer worked atRobertson Stephens & Company. Mr. Farmer is a Trustee of thePrinceton University Rowing Association. Mr. Farmer is also a director ofX-Rite, Incorporated.

 

*EdwardA. Kangas* — Mr. Kangaswas Chairman and Chief Executive Officer of Deloitte Touche Tohmatsu from 1989until his retirement in 2000. Mr. Kangas served as Managing Partner ofDeloitte & Touche (USA) from 1989 to 1994 and Managing Partner andChief Executive Officer of Touche Ross in from 1985 to 1989. After hisretirement, Mr. Kangas served as a consultant to Deloitte until 2004. Mr. Kangaswas appointed to the Board of Directors in February 2007. Mr. Kangasis also a director of Eclipsys Corporation, United Technologies, HovnanianEnterprises, Inc., Intuit Inc. and Tenet Healthcare Corporation.

 

*LeoJ. Pound* — Mr. Pound has been a Principal of PoundConsulting, which provides management consultant services to both public andprivate enterprises, since July 2000. From February 1999 to July 2000,Mr. Pound was Chief Financial Officer of Marble Crafters, a stone importerand fabricator. From October 1995 to February 1999, he was ChiefFinancial Officer of Jos. H. Stomel & Sons, a wholesale distributor. Mr. Poundis a Certified Public Accountant and a member of the American and PennsylvaniaInstitutes of Certified Public Accountants. Mr. Pound was appointed to the Board of Directors in February 2007.He had previously served on the Board of Directors of NCO Group, Inc. from2000 until the date of the Transaction in November 2006.

 

 Effective as of March 12, 2008, Messrs. JamesS. Rubin, Daniel J. Selmonosky and Tarek N. Shoeb resigned from our Board ofDirectors, and our Board appointed Messrs. Richard M. Cashin, Jr.,David M. Cohen and Colin M. Farmer to fill the vacancies. Effective December 5,2008, Mr. Steven L. Winokur resigned from his position as Executive VicePresident, Development and Chief Administration Officer.  Effective March 9, 2009, Mr. RichardM. Cashin, Jr. resigned from our Board of Directors and Mr. Briancewas appointed as director by the remaining members of our Board to fill thevacancy. Mr. Cashin was, and Mr. Briance is, a representativedesignee of One Equity Partners under the Stockholders’ Agreement describedbelow.

 

**Stockholders’ Agreement**

 

In connection withthe Transaction, on November 15, 2006, we and Michael J. Barrist, certainof Mr. Barrist’s family members and trusts formed for his or theirbenefit, our other executive officers and the other co-investors entered intostockholders’ agreements, including a stockholders agreement and a registrationrights agreement, collectively referred to as the Stockholders’ Agreements. TheStockholders’ Agreements contain agreements among the parties with respect todelivery of our periodic financial reports, confidentiality, restrictions oncertain issuances and transfers of shares, including rights of first offer,participation rights, tag-along rights and drag-along rights, registrationrights (including customary indemnification provisions) and limited call and putrights.

 

The Stockholders’Agreements further provide that our Board will consist of seven members, whichsubject to certain exceptions, will be determined as follows: Mr. Barristhas the right to be a member of our Board (including the compensation committeeand any other committee of the Board at Mr. Barrist’s election, subject tolegal limitations), and also has the right, so long as he is our chiefexecutive officer, to designate an independent member to our Board (who must bereasonably satisfactory to One Equity Partners). One Equity Partners has theright to designate three members of our Board as representatives of One EquityPartners 

 

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and to designate twoadditional independent members (who must be reasonably acceptable to Mr. Barrist).

 

One EquityPartners’ representative designees on our Board are Messrs. Briance, Cohenand Farmer and independent designees on our Board are Messrs. Adams andKangas. Mr. Barrist’s independent designee on our Board is Mr. Pound.

 

**Code of Ethics**

 

The Company hasadopted a Code of Ethics and Conduct that applies to all of its directors andemployees including, the Company’s principal executive officer, principalfinancial officer, principal accounting officer and all employees performingsimilar functions. The Company will provide a copy of the Code of Ethics andConduct without charge upon written request directed to: Joshua Gindin, Esq.,Corporate Secretary, NCO Group, Inc., 507 Prudential Road Horsham,Pennsylvania 19044. The Company intends to satisfy the disclosure requirementunder Item 5.05 of Form 8-K regarding any future amendments to a provisionof its Code of Ethics and Conduct by posting such information on the Company’swebsite www.ncogroup.com.

 

The information onthe website listed above, is not and should not be considered part of thisAnnual Report on Form 10-K and is not incorporated by reference in thisdocument. This website is, and is only intended to be, an inactive textualreference.

 

**Audit Committee Financial Expert**

 

The Board ofDirectors of the Company has determined that Mr. Pound qualifies as an “auditcommittee financial expert” as that term is defined in SEC regulations.Although not formally considered by the Board given that the Company’ssecurities are not registered or traded on any national securities exchange,based upon the listing standards of The Nasdaq Stock Market, LLC, we believethat Mr. Pound is independent under such standards.

 

**Item 11.         ExecutiveCompensation**

 

**Compensation Discussion and Analysis**

 

**Background—The Transaction**

 

On November 15,2006, NCO Group, Inc. was acquired by and became a wholly-owned subsidiaryof Collect Holdings, Inc., an entity controlled by One Equity Partners II,L.P., a private equity firm, and its affiliates, with participation by MichaelJ. Barrist, Chairman, President and Chief Executive Officer of NCO Group, Inc.,certain other members of executive management and other co-investors, referredto as the Transaction. Subsequent to the date of the Transaction, NCO Group, Inc.was merged with and into Collect Holdings, Inc. and Collect Holdings, Inc.was renamed NCO Group, Inc. As a result of the Transaction, we became aprivately-owned company.

 

In connection withthe Transaction, OEP negotiated new compensation arrangements, including newemployment agreements, with each of NCO’s executive officers, including Mr. Barrist.For a description of the material terms of such employment agreements, see “—EmploymentAgreements.” Each employment agreement, among other things, sets forth theexecutive’s minimum base salary (which shall at a minimum be upwardly adjustedeach year in accordance with the Consumer Price Index), non-equity incentivecompensation opportunities, 

 

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transition bonusopportunity, severance benefits and entitlement to participate in our benefitplans and receive certain perquisites. In connection with the negotiation ofsuch employment agreements, Mr. Barrist, our President and Chief ExecutiveOfficer, made recommendations to OEP with respect to compensation of each ofour executive officers, including himself. The purpose of the new employmentagreements was to provide certainty to the executives with respect to theirpositions with us following the change in control resulting from theTransaction and to motivate such executives to maintain and increase enterprisevalue during the transition period and ensure a smooth transition. Upon theclosing of the transaction, NCO’s Board approved the new employment agreementsfor each of our executives.

 

In addition, inconnection with the Transaction, we adopted the Restricted Share Plan,discussed in greater detail below, which authorizes grants of restricted sharesof our Class A common stock to our officers and key employees.

 

**Objectives of Our CompensationProgram**

 

Our overallcompensation program with respect to our executive officers is designed toachieve the following objectives:

 

·                  toprovide compensation that will attract and retain superior executive talent;

·                  toprovide our executive officers with compensation that reflects their overallexperience, position with NCO and expected contributions to NCO;

·                  tosupport the achievement of the goals contained in our annual budget by linkinga portion of the executive officer’s compensation to the achievement of suchgoals;

·                  tobe competitive with compensation programs offered by companies of a similarsize within similar industries based on formal and informal surveys conductedby us; and

·                  tooffer to our executive officers an economically reasonable amount of appropriatebenefits and perquisites comparable to those offered by other companies of asimilar size within similar industries.

 

**Elements of Executive Compensation**

 

The compensationpaid to our executive officers consists of the following elements:

 

·                  basesalary;

·                  performance-basedcash bonuses;

·                  equitycompensation;

·                  severancebenefits, death benefits and right to participate in a nonqualified deferredcompensation plan;

·                  otherbenefits, such as the use of an automobile and, in the case of Mr. Barrist,the personal use of an airplane; and

·                  benefitsthat are generally available to all full-time employees of our company, such asparticipation in group medical, disability and life insurance plans and a 401(k) plan.

 

These elements are discussed in greater detail below.

 

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***Base Salary.*** Base salary is used toreward superior individual performance of each executive officer on aday-to-day basis during the year, and to encourage them to perform at theirhighest levels. We also use our base salary to attract and retain top qualityexecutives and other management employees from other companies. Moreover, basesalary and increases to base salary recognize the overall experience, positionand responsibilities within NCO and expected contributions to NCO of eachexecutive officer. Typically, the Compensation Committee will review and adjustbase salaries on an annual basis. In connection with the closing of theTransaction, we entered into new employment agreements with each of ourexecutive officers. Given that the compensation of each of our executiveofficers had been renegotiated in connection with the Transaction, we did not engagethe services of a compensation consultant with respect to, or otherwiseundertake an extensive reassessment of, executive compensation for 2007 or2008. In March 2009, the Compensation Committee increased Mr. Leckerman’sannual base salary to $700,000 in light of the additional responsibilities hehad assumed in 2008, and increased Mr. Schwab’s annual base salary to$400,000 so that Mr. Schwab was compensated at a level that theCompensation Committee believed was comparable to that of chief financial officersof similarly situated companies.  TheCompensation Committee determined that the annual base salaries of our otherexecutive officers would not be increased for 2009, other than for a ConsumerPrice Index adjustment.Under their employment agreements, after giving effectto raises they received in accordance with the Consumer Price Index in effectfor 2009, Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman areentitled to receive annual base salaries for 2009 of $811,750, $400,000,$397,171, $397,171 and $700,000, respectively. Information concerning basesalaries paid to these executive officers in 2008 is set forth in “—SummaryCompensation—2008 Summary Compensation Table.”

 

***Management Incentive Compensation.*** Webelieve that a significant portion of the total potential compensation of ourexecutive officers should depend upon the degree of our financial success in aparticular year. Under the employment agreements that we entered into with eachof our executive officers, each executive is entitled to earn cash incentivecompensation of from 75 percent to 100 percent of his base salary based on ourachievement of our annual operating plan for the year. Each year the Board orthe Compensation Committee sets goals, including targets for NCO’s earningsbefore interest, taxes, depreciation and amortization, referred to as EBITDA.

 

The CompensationCommittee has determined that the annual bonus, if any, will be calculated andpaid on a pro-rata basis based on the achievement by the Company of 90 percentto 100 percent of its annual operating plan. The Compensation Committee may, indetermining the annual bonus amount, take into consideration other extenuatingcircumstances not within the control of the Company that may have occurredduring the year that impacted the original operating plan thus rendering itunattainable.

 

In March 2008,the Compensation Committee determined that the 2007 operating plan had beenachieved and awarded the full 2007 bonuses under the employment agreements. In March 2009,the Compensation Committee determined that the 2008 operating plan had not beenachieved and did not award any bonuses under the employment agreements.

 

See “—SummaryCompensation—2008 Summary Compensation Table” for the actual amounts paid outto the Named Executive Officers for 2008, 2007 and 2006. References to our “NamedExecutive Officers” means all of the executive officers named in the “2008Summary Compensation Table.” Amounts paid under the management incentiveprogram are reported in the “Non-Equity Incentive Plan Compensation” column,and amounts paid for transition 

 

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bonuses in connectionwith the Transaction are reported in the “Bonus” column.

 

For 2009, Messrs. Barrist’s,Schwab’s, Elliott’s, Gindin’s and Leckerman’s maximum bonus potential as apercentage of each individual’s base salary is equal to 100 percent, 75percent, 75 percent, 75 percent and 100 percent, respectively.

 

***Equity Compensation.*** In connectionwith the Transaction, we adopted the Restricted Share Plan which authorizesgrants of restricted shares of our Class A common stock to our officersand key employees. On March 28, 2008, the Board of Directors approved theamendment and restatement of the Restricted Share Plan to: (i) permitmembers of our Board of Directors to participate and (ii) to increase thenumber of shares authorized for issuance under the Restricted Share Plan to336,666.7 shares. Each share of restricted stock, regardless of whether therestriction period with regard to such share has lapsed, is subject to thetransfer restrictions, repurchase rights and other restrictions pursuant to theterms of a Stockholders’ Agreement. The purpose of the restricted share planawards is to align managements’ objectives with those of the stockholders. Thenumber of shares awarded to management is based on recommendations made by Mr. Barristand approved by the Compensation Committee. On March 31, 2008, each of Messrs. Barrist,Schwab, Elliott, Gindin and Leckerman were awarded 20,803.1, 11,837.8,12,149.8, 11,993.8 and 15,386.7 restricted shares of Class A common stock,respectively, which includes shares they received as an anti-dilution adjustment.  The shares of restricted stock granted underthe Restricted Share Plan vest in 25 percent increments upon each anniversaryof the date of grant, each, referred to as an annual vesting date, providedthat the recipient remains employed by us. In addition, if a recipient’semployment is terminated by us without Cause (as defined in the RestrictedShare Plan) or if a recipient terminates his employment with us for Good Reason(as defined in the Restricted Share Plan) within three months immediately precedingan annual vesting date, such award will immediately vest with respect to the 25percent of the then unvested shares that would have vested had such recipientremained employed through the annual vesting date. In addition, each restrictedshare award will immediately vest in full in the event a Change in Control orPublic Offering (each as defined in the Restricted Share Plan) occurs.

 

In the future, theCompensation Committee, on a discretionary basis, may elect to award ourexecutive officers or directors restricted stock under the Restricted SharePlan, although there is no obligation for us to do so and we do not expect anysuch awards to be material.

 

As a condition tothe grant of an award under our Restricted Share Plan, the recipient is requiredto make an election to include in the recipient’s current year income the fairmarket value, as of the date of grant, of the restricted shares pursuant toInternal Revenue Code Section 83(b). We pay the recipient an amount equalto the income taxes that the recipient incurs as a result of making the 83(b) election,as well as any additional taxes imposed as a result of the payment, referred toas a “gross-up.” These amounts are included in “All Other Compensation” columnin the “—Summary Compensation—2008 Summary Compensation Table.”

 

***Severance Benefits.*** Each NamedExecutive Officer’s employment agreement contains termination provisions thatprovide each respective executive officer with severance payments if theirrespective employment is terminated in specified circumstances. See “—PotentialPayments Upon Termination of Employment or Change in Control—Termination orChange in Control Provisions in Employment Agreements.”

 

***Death Benefits.*** We have an ExecutiveSalary Continuation Plan that provides beneficiaries of designated participantswith a salary continuation benefit in the event of the 

 

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participant’s death whileemployed by us. Executive participants are selected by the Board. We maintaininsurance on the lives of the participants to fund our obligations under theExecutive Salary Continuation Plan. Each of our Named Executive Officers is aparticipant in this Executive Salary Continuation Plan. See “—PotentialPayments Upon Termination of Employment or Change in Control—Executive SalaryContinuation Plan.”

 

***401(k) Plan Matching Contributions.***We match, in cash, 25 percent of the first 6 percent of the contributions toour 401(k) plan that each employee, including each Named ExecutiveOfficer, makes during the year. For each eligible employee, their contributionsare limited to the 15 percent of such employee’s income on a pre-tax basis,subject to limitations under Section 401(k) of the Code of 1986, asamended, referred to as the Code. We provide these matching contributions toall of our employees, including Named Executive Officers, who participate inthe 401(k) plan, to encourage them to systematically save for retirement.

 

***Deferred Compensation Plan.*** Wemaintain a non-qualified deferred compensation plan that allows eligibleemployees, including executive officers, to defer compensation in excess of theamounts that the employee can defer under our 401(k) plan because oflimits under the Code on the amount of compensation that can be deferred. Inaddition, in our absolute and sole discretion, we may make a contribution thatwill be allocated among participants in proportion to their deferrals for suchyear. For more information, see “—Nonqualified Deferred Compensation.”

 

***Perquisites, Personal Benefits and Other Compensation.***Each of our Named Executive Officers receives a limited amount of perquisitesand other personal benefits that we pay on their behalf or for which we providereimbursement. We provide our Named Executive Officers the use of an automobileleased by us at prices ranging from $1,250 to $2,300 per month or a monthlycash allowance for an equivalent amount. Mr. Barrist’s compensation also includesthe use by Mr. Barrist of an aggregate of 150 hours on an airplane that ispartly owned by NCO for both business and personal use, as determined by Mr. Barristin his discretion. We believe providing our Named Executive Officers with thesebenefits is justified because our Named Executive Officers contributesubstantially to our financial and operating performance and to the growth anddevelopment of our business. The perquisites and other personal benefitsprovided to our Named Executive Officers are disclosed below in “—SummaryCompensation—2008 Summary Compensation Table.”

 

**Processes and Procedures for theDetermination of Executive Officer and Director Compensation**

 

***Meetings of the Compensation Committee.***The Compensation Committee meets at least annually and more frequently ascircumstances require, and it also considers and takes action by writtenconsent. The Compensation Committee reports on committee actions andrecommendations at Board meetings.

 

***Scope of Authority of the Compensation Committee.***The scope of the Compensation Committee’s authority and responsibilities is setforth in its charter. The Compensation Committee’s authority includes theauthority to:

 

·                  Reviewand approve annually our goals and objectives relevant to the compensation ofthe executive officers and evaluate annually the performance of the executiveofficers in light of those goals and objectives, and consistent with therequirements 

 

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of anyemployment agreement, determine the compensation of the executive officersbased on this evaluation;

·                  Reviewannually and make recommendations to our Board concerning the following withrespect to our executive officers: employment agreements, severance agreements,change in control agreements/provisions and other compensatory arrangements, ineach case as, when and if appropriate, and any special or supplementalbenefits, in each case subject to the terms of any existing applicableemployment agreement terms;

·                  Reviewand approve new hire and promotion compensation arrangements for executiveofficers; and

·                  Reviewand recommend to our Board incentive compensation plans, long-term compensationplans, equity-based plans and deferred compensation plans for executiveofficers, including any modification to such plans, and oversee the performanceobjectives and funding for such plans and, to the extent permitted under suchplans, implement and administer such plans.

 

***Delegation of Authority.*** As providedunder the Compensation Committee’s charter, the Compensation Committee maydelegate its authority to special subcommittees of the Compensation Committeeas the Compensation Committee deems appropriate, consistent with applicablelaw. To date, the Compensation Committee has not delegated itsresponsibilities.

 

***Role of Management in Determining or Recommending ExecutiveCompensation.*** Mr. Barrist makes recommendationsconcerning the amount of compensation to be awarded to our executive officers,including himself, but does not participate in the Compensation Committee’sdeliberations or decisions.

 

***Role of Compensation Consultants in Determining orRecommending Executive Compensation.*** Under its charter,the Compensation Committee has authority to retain, at our expense, suchcounsel, consultants, experts and other professionals as it deems necessary.The Compensation Committee is currently evaluating whether it will need toengage consultants in the future.

 

**Compensation Committee Report**

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysissection appearing above with our management. Based on this review and thesediscussions, the Compensation Committee recommended to our Board of Directorsthat the Compensation Discussion and Analysis be included in our Annual Reporton Form 10-K for 2008.

 
|   | Members of the  Compensation Committee |
|--------|----------------------------------------|
|   |                                   |
|   | Austin A. Adams                        |
|   | Colin M. Farmer                        |
|   | Edward A. Kangas                       |

 

*Theinformation contained in this Compensation Committee Report is not “solicitingmaterial” and has not been “filed” with the Securities and ExchangeCommission.  This Compensation CommitteeReport will not be incorporated by reference into any of our future filingsunder the Securities Act of 1933 or the Securities Exchange Act of 1934, exceptto the extent that we may specifically incorporate it by reference into afuture filing.*

 

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**Summary Compensation**

 

The following table setsforth the compensation earned during 2008, 2007 and 2006 by our Chief ExecutiveOfficer, our Chief Financial Officer, and our three other most highlycompensated executive officers who were serving as executive officers at theend of the year. We refer to these individuals collectively as our “NamedExecutive Officers.”

 

**2008Summary Compensation Table**

 
| **Name and Principal  Position**                                                                       | ** ** | **Year**         | ** ** | **Salary  ($)**           | ** ** | **Bonus(1)  ($)**         | ** ** | **Stock  Awards(2)  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation(3)  ($)** | ** ** | **All Other  Compensation(4)  ($)** | ** ** | **Total  ($)**                  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| Michael J.  Barrist  President and Chief  Executive Officer                                       |       | 2008  2007  2006 |       | 784,592  767,838  738,720 |       | —  —  3,400,000 |       | 38,861  —  1,844,856 |       | —  768,084  738,720                             |       | 768,018  518,342  956,074           |       | 1,591,471  2,054,264  7,678,370 |       |
|                                                                                                   |       |             |       |                      |       |                      |       |                      |       |                                                 |       |                                |       |                            |       |
| John R. Schwab  Executive Vice  President, Finance,  Chief Financial Officer and Treasurer             |       | 2008  2007  2006 |       | 344,933  337,741  300,830 |       | —  75,000  340,000   |       | 85,072  56,170  93,890    |       | —  253,256  350,000                             |       | 95,212  18,643  22,395              |       | 525,217  740,810  1,107,115     |       |
|                                                                                                   |       |             |       |                      |       |                      |       |                      |       |                                                 |       |                                |       |                            |       |
| Stephen W.  Elliott  Executive Vice  President, Information  Technology and Chief  Information Officer |       | 2008  2007  2006 |       | 383,883  382,354  316,860 |       | —  53,000  587,000   |       | 85,655  56,170  258,302   |       | —  281,854  237,645                             |       | 86,119  31,225  33,742              |       | 555,657  804,603  1,433,549     |       |
|                                                                                                   |       |             |       |                      |       |                      |       |                      |       |                                                 |       |                                |       |                            |       |
| Joshua  Gindin, Esq.  Executive Vice  President and General  Counsel                              |       | 2008  2007  2006 |       | 383,883  378,536  316,860 |       | —  94,000  421,000   |       | 85,363  56,170  260,549   |       | —  281,855  237,645                             |       | 83,545  27,127  30,345              |       | 552,791  837,688  1,266,399     |       |
|                                                                                                   |       |             |       |                      |       |                      |       |                      |       |                                                 |       |                                |       |                            |       |
| Steven Leckerman  Executive Vice  President and Chief  Operating Officer                               |       | 2008  2007  2006 |       | 645,784  622,950  435,160 |       | —  561,000  889,000  |       | 109,069  71,665  644,100  |       | —  623,400  435,160                             |       | 97,807  24,461  30,737              |       | 852,660  1,903,476  2,434,157   |       |

 

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(1)          Theamounts in this column represent transition bonuses earned by the NamedExecutive Officers. In connection with the Transaction, each of the NamedExecutive Officers was awarded a transition bonus for certain transitionservices to be performed by the Named Executive Officers. Each of thetransition bonus were paid in installments in 2006 and 2007 per a scheduleset forth in the applicable employment agreement.

(2)          Theamounts in this column include amounts we recognized in 2008, 2007 and 2006 forfinancial statement reporting purposes for restricted stock granted under ourRestricted Share Plan. In addition, the amounts in this column include amountswe recognized in 2006 for financial statement reporting purposes for restrictedstock unit awards granted by NCO in prior years. Due to the Transaction, thevesting of restricted stock units was accelerated in 2006. The effect of thisacceleration is included in the amounts included in this column. The amountsare valued based on the amount we recognized in 2008, 2007 and 2006 forfinancial statement reporting purposes for stock awards pursuant to FinancialAccounting Standards Board Statement of Financial Accounting Standards No. 123(revised 2004)*Share-Based Payment*(“FAS 123R”), except that, in accordance with rules of the SEC, anyestimate for forfeitures is excluded from and does not reduce, such amounts.

(3)          Representsamounts earned under our management incentive program for executive officers.See “—Grants of Plan-Based Awards.”

 

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(4)          Thefollowing table summarizes all other compensation paid during 2008 to our NamedExecutive Officers.

 
| **Executive Officer**     | ** ** | **Tax  Reimbursement(a)  ($)** | ** ** | **Car (b)  ($)** | ** ** | **Aircraft  Usage(c)  ($)** | ** ** | **Other Compensation(d)  ($)** | ** ** | **Total All  Other  Compensation  ($)** | ** ** |
|---------------------------|------------|--------------------------------|------------|------------------|------------|-----------------------------|------------|--------------------------------|------------|----------------------------------------------|------------|
| Michael J.  Barrist       |       | 95,685                         |       | 26,194           |       | 636,470                     |       | 9,669                          |       | 768,018                                      |       |
| John R. Schwab            |       | 74,094                         |       | 14,466           |       | —                      |       | 6,652                          |       | 95,212                                       |       |
| Stephen W.  Elliott       |       | 55,884                         |       | 17,400           |       | —                      |       | 12,835                         |       | 86,119                                       |       |
| Joshua  Gindin, Esq. |       | 55,166                         |       | 18,592           |       | —                      |       | 9,787                          |       | 83,545                                       |       |
| Steven Leckerman          |       | 70,772                         |       | 19,372           |       | —                      |       | 7,663                          |       | 97,807                                       |       |

 

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(a)          Asa condition to the grant of an award under our Restricted Share Plan, therecipient is required to make an election to include in the recipient’s currentyear income the fair market value, as of the date of grant, of the restrictedshares pursuant to Internal Revenue Code Section 83(b). The amountreported represents the amount that we pay the recipient as reimbursement forthe income taxes that the recipient incurs as a result of making the 83(b) election,as well as any additional taxes imposed as a result of the payment.

(b)         Theamount reported represents the amount we paid to lease the Named ExecutiveOfficers’ respective cars.

(c)          RepresentsMr. Barrist’s personal use of an aircraft partly owned by us, calculatedby using our actual variable operating costs of $290,538 plus the hourly costequivalent for the monthly management fee, interest and depreciation of $66,229and lost tax benefits to us of $279,703 attributable to such flights.

(d)         RepresentsCompany paid or reimbursed health, disability, and life insurance premiums andCompany contributions to 401(k) plans.

 

**Grants of Plan-Based Awards**

 

Thefollowing table shows all plan-based awards granted to the Named ExecutiveOfficers during 2008.

 
| ** **                | ** ** | ** **      | ** ** | **Estimated Possible Payouts  Under Non-Equity Incentive  Plan Awards** | ** ** | **All Other Stock Awards:  Number of  Shares of Stock** | ** ** | **Grant Date  Fair Value  Of Stock  And Option** | ** ** |
|---------------------------|------------|-----------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Name**                  | ** ** | **Grant  Date** | ** ** | **Threshold  ($)**                                                      | ** ** | **Target  ($)**                                         | ** ** | **Maximum  ($)**                                 | ** ** | **or Units(2)  (#)** | ** ** | **Awards(3)  ($)** | ** ** |
| Michael J.  Barrist       |       | (1)  3/31/08    |       | —  —                                                          |       | 784,592  —                                         | (1)        | —                                           |       | —  20,803.1 |   | —  208,031 |   |
| John R. Schwab            |       | (1)  3/31/08    |       | —  —                                                          |       | 258,700  —                                         | (1)        | —  —                                   |       | —  11,837.8 |   | —  118,378 |   |
| Stephen W.  Elliott       |       | (1)  3/31/08    |       | —  —                                                          |       | 287,912  —                                         | (1)        | —  —                                   |       | —  12,149.9 |   | —  121,498 |   |
| Joshua  Gindin, Esq. |       | (1)  3/31/08    |       | —  —                                                          |       | 287,912  —                                         | (1)        | —  —                                   |       | —  11,993.8 |   | —  119,938 |   |
| Steven Leckerman          |       | (1)  3/31/08    |       | —  —                                                          |       | 645,784  —                                         | (1)        | —  —                                   |       | —  15,386.8 |   | —  153,867 |   |

 

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(1)          Underthe employment agreements that we entered into with each of our executiveofficers, each executive is entitled to earn incentive compensation of from 75percent to 100 percent of his base salary based on our achievement of ourannual operating plan for the year.  Messrs. Barrist’s,Schwab’s, Elliott’s, Gindin’s and Leckerman’s maximum bonus potential as apercentage of each individual’s base salary is equal to 100 percent, 75percent, 75 percent, 75 percent and 100 percent, respectively.

(2)          Representsawards of restricted shares under our Restricted Share Plan which are scheduledto vest in 25 percent increments over a period of four years beginning on thefirst anniversary of the date of grant, provided that the recipient remainsemployed by us. In addition, if a recipient’s employment is terminated by uswithout Cause (as defined in the Restricted Share Plan) or if a recipientterminates his employment with us for Good Reason (as defined in the RestrictedShare Plan) within three months immediately preceding an annual vesting date,such award will immediately vest with respect to the 25 percent of the thenunvested shares that would

 

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have vested hadsuch recipient remained employed through the annual vesting date. In addition,each restricted share award will immediately vest in full in the event a Changein Control or Public Offering (each as defined in the Restricted Share Plan)occurs. See “—Restricted Share Plan” and “—Potential Payments Upon Terminationof Employment or Change in Control.” If cash dividends are declared by ourBoard on our common stock, dividends will be paid on the shares of restrictedstock awarded under our Restricted Share Plan regardless of vesting.

(3)          Thiscolumn shows the full grant date fair value, under FAS 123R, of restrictedshares granted to each Named Executive Officer on March 31, 2008, exceptthat, in accordance with rules of the SEC, any estimate for forfeitures isexcluded from and does not reduce such amounts. Generally, the full grant datefair value is the amount we would recognize for financial statement reportingpurposes over the award’s vesting schedule. Subsequent to the Transaction, ourcommon stock is no longer publicly traded and therefore no market value for ourshares is readily available. Amounts in this column represent the value of theshares based on their most recent purchase price per share.

 

**Employment Agreements**

 

Upon consummation of theTransaction, we entered into definitive employment agreements, effective as of November 15,2006, with each of our executive officers.

 

The terms of Mr. Barrist’spost-Transaction employment agreement include:

 

·                  Mr. Barristwill serve as our President and Chief Executive Officer;

·                  Theinitial term of Mr. Barrist’s employment agreement is five years, may beextended thereafter and is subject to early termination;

·                  Mr. Barristwill receive a base salary as stated in the employment agreement, to beadjusted upward, at a minimum, annually in accordance with the Consumer PriceIndex in effect for such year;

·                  Mr. Barristwill receive employee benefits similar with those provided to him prior to theTransaction;

·                  Mr. Barristwill have the opportunity to earn an annual cash bonus equal to 100 percent ofhis base salary (the top percentage of base salary that Mr. Barrist canearn as an annual bonus is referred to as Mr. Barrist’s “target bonus”),based upon the achievement by us of our annual operating plan for theimmediately preceding year as presented to the Board by our chief executiveofficer and approved by the Board;

·                  Mr. Barristwill be entitled to receive a $3.4 million cash bonus for certain transitionservices, referred to as a transition bonus, to be performed by Mr. Barristduring the 12-month period following the closing of the Transaction;

·                  Mr. Barristwill receive a car allowance of $2,500 per month, an aggregate of 150 hours peryear (for both business and personal use) on an airplane that is partly ownedby us and will receive other perquisites consistent with those provided to Mr. Barristprior to the Transaction;

·                  Upona termination of employment by reason of death, disability, without “cause” ora resignation for “good reason,” Mr. Barrist will receive his accrued butunpaid base salary and target bonus, continue to receive base salary, targetbonuses and health and welfare benefits for the greater of (i) one year or(ii) the remainder of the initial term of his employment agreement and,within 10 days of termination, will receive a lump sum payment of any and allunpaid installments of Mr. Barrist’s transition bonus (see “—PotentialPayments Upon Termination of Employment or Change in Control”);

·                  Upona termination of employment by reason of death, Mr. Barrist’sbeneficiaries will also be paid the amounts owed under our Executive SalaryContinuation Plan (see “—Potential Payments Upon Termination of Employment orChange in Control”);

 

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·                  Upona termination of employment for “cause” or a resignation without “good reason,”Mr. Barrist will receive his accrued but unpaid base salary and annualbonus and, within 10 days of termination, will receive a lump sum payment ofany and all unpaid installments of Mr. Barrist’s transition bonus (see “—PotentialPayments Upon Termination of Employment or Change in Control”);

·                  Mr. Barristis subject to non-compete, non-solicitation and non-interference covenantsduring his employment and ending on the later of (i) the last day hereceives severance pay under his employment agreement or (ii) two yearsafter termination of employment;

·                  Duringand after Mr. Barrist’s employment with us, Mr. Barrist is subject toa confidentiality covenant; and

·                  Mr. Barristwill be entitled, under certain circumstances, to receive reimbursement from usfor taxes, if any, imposed on Mr. Barrist under Section 4999 of theCode and/or under Section 409A of the Code and any federal, state, localand excise taxes imposed upon the reimbursement.

 

The terms of theemployment agreements of our other executive officers, Messrs. Schwab,Elliott, Gindin, Leckerman and Albert Zezulinski include the following terms:

 

·                  Eachexecutive will retain the same position as that held with NCO prior to theTransaction;

·                  Theinitial term of each employment agreement is five years, each may be extendedthereafter and each is subject to early termination;

·                  Eachof Messrs. Schwab, Elliott, Gindin, Leckerman and Zezulinski will receivebase salaries as stated in their respective employment agreements, to beadjusted upward, at a minimum, annually in accordance with the Consumer PriceIndex in effect for such year;

·                  Eachexecutive will receive employee benefits and perquisites similar with thoseprovided prior to the Transaction;

·                  Eachof Messrs. Schwab, Elliott, Gindin, Leckerman and Zezulinski will have theopportunity to earn an annual bonus equal to 75 percent, 75 percent, 75 percent,100 percent and 75 percent, respectively, of his base salary (the toppercentage of base salary that each executive can earn as an annual bonus isreferred to as such executive’s “target bonus”), based upon the achievement byus of our annual operating plan for the immediately preceding year as presentedto the Board by our chief executive officer and approved by the Board;

·                  Upona termination of employment during the five year period commencing November 15,2006 by reason of death, disability, without “cause” or a resignation for “goodreason,” the executive will receive his accrued but unpaid base salary andannual bonus, will continue to receive base salary, target bonuses and healthand welfare benefits for two years following termination and, within 10 days oftermination, will receive a lump sum payment of any and all unpaid installmentsof such executive’s transition bonus (see “—Potential Payments Upon Terminationof Employment or Change in Control”);

·                  Upona termination of employment after the five year period commencing November 15,2006 by reason of death, disability, without “cause” or a resignation for “goodreason,” the executive will receive his accrued but unpaid base salary andannual bonus, will continue to receive his base salary, target bonus and healthand welfare benefits for one year following termination and, within 10 days oftermination, will receive a lump sum payment of any and all unpaid installmentsof 

 

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suchexecutive’s transition bonus (see “—Potential Payments Upon Termination ofEmployment or Change in Control”);

·                  Upona termination of employment by reason of death, the executive’s beneficiarieswill also be paid the amounts owed under our Executive Salary Continuation Plan(see “—Potential Payments Upon Termination of Employment or Change in Control”);

·                  Upona termination of employment for “cause” or a resignation without “good reason,”the executive will receive his accrued but unpaid base salary and annual bonusand, within 10 days of termination, will receive a lump sum payment of theunpaid balance of a certain portion of such executive’s transition bonus (see “—PotentialPayments Upon Termination of Employment or Change in Control”);

·                  Theexecutive is subject to non-compete and non-solicitation covenants during hisemployment and for (i) two years after termination of employment if hisemployment is terminated during the five year period commencing November 15,2006 or (ii) one year after termination of employment if his employment isterminated after the five year period commencing November 15, 2006;

·                  Theexecutive is subject to a non-interference covenant during his employment andfor (i) three years after termination of employment if his employment isterminated during the five year period commencing November 15, 2006 or (ii) twoyears after termination of employment if his employment is terminated after thefive year period commencing November 15, 2006;

·                  Duringand after employment with us, the executive is subject to a confidentialitycovenant; and

·                  Theexecutive will be entitled, under certain circumstances, to receivereimbursement from us for taxes, if any, imposed on the executive under Section 4999of the Code and/or under Section 409A of the Code and any federal, state,local and excise taxes imposed upon the reimbursement.

 

**Restricted Share Plan**

 

On November 15,2006, and in connection with the consummation of the Transaction, we adopted arestricted share plan, known as the NCO Group, Inc. Restricted Share Plan(f/k/a Collect Holdings, Inc. Restricted Share Plan) which authorizesgrants of restricted shares of our Class A common stock to our officersand key employees. On March 28, 2008, the Board of Directors approved the amendmentand restatement of the Restricted Share Plan to: (i) permit members of ourBoard of Directors to participate and (ii) to increase the number ofshares authorized for issuance under that Plan to 336,666.7 shares (the “RestrictedShare Plan”). The Restricted Share Plan is administered by the CompensationCommittee of our Board, which approves the grants to employees recommended byour chief executive officer. Each share of restricted stock, regardless ofwhether the restriction period with regard to such share has lapsed, is subjectto the transfer restrictions, repurchase rights and other restrictions pursuantto the terms of a Stockholders’ Agreement. The shares of restricted stockgranted under the Restricted Share Plan vest in 25 percent increments upon eachanniversary of the date of grant, each, referred to as an annual vesting date,provided that the recipient remains employed by us. In addition, if a recipient’semployment is terminated by us without Cause (as defined in the RestrictedShare Plan) or if a recipient terminates his employment with us for Good Reason(as defined in the Restricted Share Plan) within three months immediatelypreceding an annual vesting date, such award will immediately vest with respectto the 25 percent of the then unvested shares that would have vested had suchrecipient remained employed through the annual vesting date. In addition, eachrestricted share award will immediately vest in full in the event a Change inControl or Public Offering (each as defined 

 

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in the Restricted SharePlan) occurs. See “—Potential Payments Upon Termination of Employment or Changein Control.”

 

If cash dividends aredeclared by our Board on our common stock, dividends will be paid on the sharesof restricted stock awarded under our Restricted Share Plan regardless ofvesting.

 

On March 31, 2008,the Board of Directors approved the amendment and restatement of the RestrictedShare Plan to: (i) permit members of our Board of Directors to participateand (ii) to increase the number of shares authorized for issuance underthat Plan to 336,666.7 shares. Effective as of the amendment of that Plan, weissued 105,036.7 restricted shares of Class A common stock to executiveofficers, employees and certain directors of the Company, including thefollowing:

 
| **Executive Officers**    | ** ** | **Shares** | ** ** |
|---------------------------|------------|------------|------------|
| Stephen W.  Elliott       |       | 11,733.8   |       |
| Joshua Gindin             |       | 11,733.8   |       |
| Steven Leckerman          |       | 14,970.7   |       |
| John R. Schwab            |       | 11,733.8   |       |
| Steven L.  Winokur        |       | 10,488.8   |       |
| Albert  Zezulinski        |       | 11,111.3   |       |
| Total Executive  Officers |       | 71,772.2   |       |

 
| **Directors**    | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| Austin A. Adams  |       | 1,291.9    |       |
| Edward A. Kangas |       | 1,291.9    |       |
| Leo J. Pound     |       | 1,291.9    |       |
| Total Directors  |       | 3,875.7    |       |

 

In addition, on March 31,2008, the Board approved the grant of a total of 22,467.3 shares of Class Acommon stock to certain members or former members of management that hadpurchased Company shares in connection with the Transaction. The shares wereissued as an anti-dilution adjustment with respect to the shares purchase inthe Transaction as a result of the February 2008 private placement ofadditional equity with One Equity Partners and other stockholders to fund theOSI acquisition. Shares issued to our current executive officers were asfollows:

 
| **Name**            | ** ** | **Shares** | ** ** |
|---------------------|------------|------------|------------|
| Michael J.  Barrist |       | 20,803.1   |       |
| Stephen W.  Elliott |       | 416.1      |       |
| Joshua Gindin       |       | 260.0      |       |
| Steven Leckerman    |       | 416.1      |       |
| John R. Schwab      |       | 104.0      |       |
| Steven L.Winokur    |       | 260.0      |       |
| Albert  Zezulinski  |       | 208.0      |       |

 

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**Outstanding Equity Awards at Fiscal Year End**

 

The following table showsall outstanding equity awards held by the Named Executive Officers as of December 31,2008.

 
| ** **                | ** ** | **Stock Awards**                                                                | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Name**                  | ** ** | **Number of Shares  or Units of Stock  That Have Not Vested(1)  (#)** | ** ** | **Market Value of Shares  or Units of Stock That  Have Not Vested(2)  ($)** | ** ** |
| Michael J.  Barrist       |       | 20,803.1                                                                        |       | N/A |   |
| John R. Schwab            |       | 25,540.2                                                                        |       | N/A |   |
| Stephen W.  Elliott       |       | 25,852.2                                                                        |       | N/A |   |
| Joshua  Gindin, Esq. |       | 25,696.2                                                                        |       | N/A |   |
| Steven Leckerman          |       | 32,869.1                                                                        |       | N/A |   |

 

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(1)           Represents awards ofrestricted shares under our Restricted Share Plan which are scheduled to vestin 25 percent increments over a period of 4 years beginning on the firstanniversary of the date of grant, provided that the recipient remains employedby us. In addition, if a recipient’s employment is terminated by us withoutCause (as defined in the Restricted Share Plan) or if a recipient terminateshis employment with us for Good Reason (as defined in the Restricted SharePlan) within three months immediately preceding an annual vesting date, suchaward will immediately vest with respect to the 25 percent of the then unvestedshares that would have vested had such recipient remained employed through theannual vesting date. The restricted shares were granted on November 17, 2006,August 10, 2007 and March 31, 2008. In addition, each restricted share awardwill immediately vest in full in the event a Change in Control or PublicOffering (each as defined in the Restricted Share Plan) occurs. See “—RestrictedShare Plan” and “—Potential Payments Upon Termination of Employment or Changein Control.”

(2)           Subsequent to theTransaction, our common stock is no longer publicly traded and therefore nomarket value for our shares is readily available.

 

**Stock Vested**

 

The following tableprovides information concerning restricted share awards held by the NamedExecutive Officers that vested during 2008.

 
| ** **                | ** ** | **Stock Awards**                                      | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| **Name**                  | ** ** | **Number of  Shares  Acquired on  Vesting  (#)** | ** ** | **Value  Realized on  Vesting  ($)(1)** | ** ** |
| Michael J.  Barrist       |       | —                                                |       | — |   |
| John R. Schwab            |       | 6,295.8                                               |       | 62,958 |   |
| Stephen W.  Elliott       |       | 6,295.8                                               |       | 62,958 |   |
| Joshua  Gindin, Esq. |       | 6,295.8                                               |       | 62,958 |   |
| Steven Leckerman          |       | 8,032.6                                               |       | 80,326 |   |

 

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(1)          Subsequentto the Transaction, our common stock is no longer publicly traded and thereforeno market value for our shares is readily available. Amounts in this columnrepresent the value of the shares based on their most recent purchase price pershare.

 

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**Nonqualified Deferred Compensation**

 

Our Deferred CompensationPlan permits eligible employees to defer receipt and taxation of theircompensation each year up to the limit in effect under Section 402(g) ofthe Code (less amounts contributed to our 401(k) Plan). In addition, inour absolute and sole discretion, we may make a contribution that will beallocated among participants in proportion to their deferrals for such year.All executive officers and other key employees designated by us are eligible toparticipate in the Deferred Compensation Plan.

 

Amounts deferred or contributedare placed in a rabbi trust, of which Putnam Fiduciary Trust Company isdirected trustee. Participants may designate certain Putnam mutual funds bywhich the value of their accounts will be measured, but all investments ofDeferred Compensation Plan funds are made as directed by us in our solediscretion.

 

A participant is 100percent vested as to amounts deferred by the participant. Any companycontributions will be 100 percent vested upon a participant’s having threeyears of service, termination of employment due to death or disability,reaching age 65 or upon a “change of control” (as defined in the DeferredCompensation Plan) of us. A participant’s benefits in the Deferred CompensationPlan are payable as soon as practicable following termination of employment ora “change of control” of the company.

 

A participant may make anearly withdrawal if such participant demonstrates a special need or hardshipdue to “severe financial emergency.”

 

The following tableprovides information concerning amounts held under the Deferred CompensationPlan for the benefit of our Named Executive Officers.

 
| **Name**                  | ** ** | **Executive  Contributions  in Last FY (1)  ($)** | ** ** | **Registrant  Contributions  in Last FY (2)  ($)** | ** ** | **Aggregate  Earnings  (Losses) in  Last FY (3)  ($)** | ** ** | **Aggregate  Balance at  Last FY (4)  ($)** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Michael J.  Barrist       |       | —                                            |       | —                                             |       | (6,004                                                      | )          | 20,241                                                |       |
| John R. Schwab            |       | —                                            |       | —                                             |       | (2,870                                                      | )          | 7,153                                                 |       |
| Stephen W.  Elliott       |       | —                                            |       | —                                             |       | —                                                      |       | —                                                |       |
| Joshua  Gindin, Esq. |       | —                                            |       | —                                             |       | —                                                      |       | —                                                |       |
| Steven Leckerman          |       | —                                            |       | —                                             |       | —                                                      |       | —                                                |       |

 

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(1)          Representsamounts voluntarily contributed by the Named Executive Officers in 2008, suchamounts are also reported as salary in the Summary Compensation Table.

(2)          Amountscontributed by us in 2008 are also included in the “All Other Compensation”column of the Summary Compensation Table.

(3)          Theaggregate earnings (losses) represent the market value change of this planduring 2008. Earnings (Losses) received by the Named Executive Officers are notreported as compensation in the Summary Compensation Table because suchearnings are not considered to be “above market” earnings under SECregulations.

(4)          Amountsreported in the Aggregate Balance at Last FY which were previously reported ascompensation to the Named Executive Officers in the Summary Compensation Tableincluded in prior SEC filings for previous years included $22,416 and $5,894for Messrs. Barrist and Schwab, respectively. These amounts representexecutive contributions and registrant contributions for prior years.

 

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**PotentialPayments Upon Termination of Employment or Change in Control**

 

**Executive Salary Continuation Plan**

 

We have an ExecutiveSalary Continuation Plan that provides beneficiaries of designated participantswith a salary continuation benefit in the event of the participant’s deathwhile employed by us. Executive participants are selected by the Board. Wemaintain insurance on the lives of the participants to fund our obligationsunder the Executive Salary Continuation Plan. Each of Messrs. Barrist,Schwab, Elliott, Gindin and Leckerman is a participant in this Executive SalaryContinuation Plan and their respective beneficiaries will be entitled toreceive 100 percent salary and bonus potential (based on each executive’starget bonus) continuation payments for five years in the event of their death.

 

**Termination or Change in ControlProvisions in Restricted Share Plan**

 

Generally, the RestrictedShare Plan states that the Compensation Committee of our Board will determine,in the terms of the applicable award agreement, the time or times when and themanner and condition in which each award will vest and the extent, if any, towhich vesting accelerates upon a Change in Control. “Change of Control” isdefined in the Restricted Share Plan as (i) any liquidation, dissolutionor winding up of our company, whether voluntary or involuntary, (ii) anytransfer by our company of all or substantially all of its assets on a consolidatedbasis, (iii) any consolidation, merger or reorganization of our companywith or into any other entity or entities as a result of which the holders ofour company’s outstanding capital stock possessing the voting power (underordinary circumstances) to elect a majority of our Board immediately prior tosuch consolidation, merger or reorganization no longer beneficially own,directly or indirectly, the outstanding capital stock of the survivingcorporation possessing the voting power (under ordinary circumstances) to electa majority of the surviving corporation’s board of directors, (iv) anytransfer to any third party of shares of our company’s capital stock by theholders thereof as a result of which the holders of our company’s outstandingcapital stock possessing the voting power (under ordinary circumstances) toelect a majority of our company’s Board immediately prior to such transfer nolonger beneficially own, directly or indirectly, the outstanding capital stockof our company possessing the voting power (under ordinary circumstances) toelect a majority of our company’s Board, or (v) a change in theconstituency of the Board with the result that individuals, who are members ofthe Board on November 15, 2006 (or individuals designated by OEP or Mr. Barristin place thereof) cease for any reason to constitute at least a majority of theBoard.

 

The individual awardagreements issued to management on November 17, 2006 provide the followingenhanced vesting provisions related to termination of employment or a Change ofControl:

 

·      If a holder’s employment is terminated by uswithout “Cause” or if the holder terminates his employment for “Good Reason”within three months immediately preceding an annual vesting date, such holder’saward will immediately vest with respect to the 25 percent of the then unvestedshares that would have vested had the holder remained employed through thatannual vesting dates; and

·      In the event that during a holder’s servicewith us, a Change in Control occurs, then 100 percent of the holder’s awardwill become vested.

 

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“Cause” is defined in theRestricted Share Plan as (i) an indictment of employee in connection witha crime involving moral turpitude or any felony, which materially adverselyaffects our company or employee’s ability to perform the duties of hisemployment; (ii) a conviction of, or a plea of guilty or no-contest by,employee to any felony; (iii) the employee’s dishonesty, fraud, unethicalor illegal act, misappropriation or embezzlement which does (or wouldreasonably be likely to) materially damage our company or our company’sreputation; (iv) willful or deliberate material violations of the employee’sobligations to our company; or (v) a material breach of any of the termsor conditions of an employment agreement between the employee and us, subject,in the case of (iv) and (v) above, to a 20 day cure period. “GoodReason” is defined in the Restricted Share Plan as: (i) a materialdiminution of the employee’s duties or responsibilities under a contract ofemployment with our company; (ii) a material decrease in the employee’sbase salary or bonus opportunity or other material benefits, other than inconnection with such a reduction occasioned by our company’s businessconditions or prospects and applicable to all similarly situated companyemployees; and (iii) any material violation by our company of a contractof employment with the employee, subject, in the case of (i) — (iii) above,to a 20 day cure period.

 

The individual awardagreements issued to management on November 17, 2006 also provide that inthe event that no public offering has occurred and a holder of restrictedshares ceases to be employed by us for any reason within five years of theclosing of the Transaction, all of the holder’s restricted shares, whether ornot vested, will remain outstanding following the date of such holder’stermination of employment and, for a 180-day period thereafter, we will havethe right to repurchase both the vested and unvested portions of such awards atthe prices set forth below, as applicable:

 

·      If a holder ceases to be employed by us for any reason other than a terminationfor Cause, we will repurchase the portion of such award that is (a) vestedshares of common stock for their then Fair Market Value (as defined below); and(b) not vested for the lesser of (i) the Fair Market Value as of thetermination date, or (ii) 40 percent of the Fair Market Value as of thedate of grant of the restricted shares; and

·      If a holder is terminated for Cause, any stock that such holder wouldhave acquired under the award, whether or not vested and otherwise free fromrestriction, will be subject to repurchase by us for the lesser of (i) theFair Market Value as of the termination date, or (ii) 40 percent of theFair Market Value as of the date of grant of the restricted shares.

 

“Fair Market Value”, inthe context of our current repurchase option, is defined in the RestrictedShare Plan as the fair market value as determined by the Board, subject incertain cases, to change based upon an appraisal by an independent investmentbank or other independent valuation expert.

 

In the event that we donot exercise our buyback right described above within 180 days following theexecutive’s termination of employment, the restrictions on the restrictedshares that were not vested (and did not vest) as a result of the holder’stermination of employment will at that date lapse in full and the holder willretain all such restricted shares, as well as all of the restricted shares thatwere vested as of, or vested in connection with, the holder’s termination ofemployment.

 

The individual awardagreements issued to the executives at the closing of the Transaction furtherprovide that in the event a holder’s employment terminates at any time

 

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following, the earlier tooccur of (a) a public offering and (b) the fifth anniversary of theclosing of the Transaction, the holder will retain all restricted shares thatwere vested at the time of termination (including any restricted shares thatvested in connection with the public offering or termination).

 

**Termination or Change in ControlProvisions in Employment Agreements**

 

***MichaelJ. Barrist.*** Mr. Barrist’s employment agreementprovides that upon a termination of employment by reason of death, disability,without “Cause” or a resignation for “Good Reason,” Mr. Barrist willreceive his accrued but unpaid base salary and target bonus, continue toreceive base salary, target bonuses and health and welfare benefits for thegreater of (i) one year or (ii) the remainder of the initial term ofhis employment agreement. In addition, Mr. Barrist’s employment agreementprovides that if Mr. Barrist’s employment is terminated by reason ofdeath, his beneficiaries will be paid the amounts owed under our ExecutiveSalary Continuation Plan. See “—Executive Salary Continuation Plan” describedabove.

 

Mr. Barrist’semployment agreement provides that upon a termination of employment for “Cause”or a resignation without “Good Reason,” Mr. Barrist will receive hisaccrued but unpaid base salary and annual bonus.

 

“Cause” is defined in Mr. Barrist’semployment agreement as his (i) conviction of, or guilty plea with respectto, a felony; (ii) a nolo contender plea with respect to a felony (otherthan in respect of a claim or allegation by a governmental regulatoryauthority); (iii) willful illegal conduct or gross misconduct that, in thereasonable good faith judgment of the Board, materially interferes with Mr. Barrist’sability to perform his duties for our company; or (iv) any willfulmaterial breach of any of the covenants in his employment agreement afternotice and thirty days from the date Mr. Barrist receives such notice, tocure such event or condition to the extent such event or conditions isreasonably susceptible to cure. No act or failure to act by Mr. Barristwill be considered willful unless it is done, or omitted to be done, by Mr. Barristin bad faith or without reasonable belief that such action or inaction was inthe best interests of our company. Any act, or failure to act by Mr. Barrist,based on authority given pursuant to a resolution duly adopted by the Board orbased upon the advice of counsel of our company will be conclusively presumedto be in good faith and in the bests interests of our company.

 

“Good Reason” is definedin Mr. Barrist’s employment agreement as (i) the assignment to Mr. Barristof any duties materially inconsistent, in any respect, with Mr. Barrist’sposition (including status, offices, titles and reporting requirements),authority, duties or responsibilities as contemplated by Mr. Barrist’s employmentagreement, or any other action by us which results in a material diminution insuch position, authority, duties or responsibilities, excluding for thispurpose any action not taken in bad faith and which is remedied by us promptlyafter receipt of notice thereof given by Mr. Barrist; (ii) a changein Mr. Barrist’s principal work location to a location more than 40 milesfrom Horsham, Pennsylvania, except for required travel on company business toan extent substantially consistent with Mr. Barrist’s business travelobligations; (iii) any violation of the terms or conditions of Mr. Barrist’semployment agreement, including, without limitation, failure to pay anycompensation when due; (iv) any material change to the nature of ourbusiness if such change is implemented over Mr. Barrist’s objection,which, for purposes hereof, is agreed to be (a) business processoutsourcing focused primarily on accounts receivable collections, portfoliopurchase and customer relationship management and (b) the purchase and

 

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management of overdueaccounts receivable (the “Business”); or (v) in the event that JPMorganChase Bank (either directly or indirectly) requires changes to our managementor strategic plans in order to address concerns or issues that are primarilyrelated to JPMorgan Chase Bank and its affiliates (other than our company)(including the ownership by JPMorgan Chase Bank and its affiliates (other thanour company) of a company engaged in the Business) as opposed to concerns orissues primarily related to the performance of our company, and suchinterference would reasonably be expected to have an adverse effect of amaterial nature on the value of Mr. Barrist’s investment in our company,or may result in the liquidation or sale of our company, subject in the case of(i) — (v) above to a 30 day cure period.

 

***OtherNamed Executive Officers.*** The employment agreements ofour other Named Executive Officers, Messrs. Schwab, Elliott, Gindin andLeckerman, provide that upon a termination of employment during the five yearperiod commencing November 15, 2006 by reason of death, disability,without “Cause” or a resignation for “Good Reason,” the executive will receivehis accrued but unpaid base salary and annual bonus, will continue to receivehis then current base salary, target bonuses and health and welfare benefitsfor two years following termination. In addition, each the employmentagreements provide that if such executive’s employment is terminated by reasonof death, his beneficiaries will be paid the amounts owed under our ExecutiveSalary Continuation Plan. See “—Executive Salary Continuation Plan” describedabove.

 

The employment agreementsfurther provide that upon a termination of employment after the five yearperiod commencing November 15, 2006 by reason of death, disability,without “Cause” or a resignation for “Good Reason,” the executive will receivehis accrued but unpaid base salary and annual bonus, will continue to receivehis then current base salary, target bonus and health and welfare benefits forone year following termination.

 

The employment agreementsalso provide that upon a termination of employment for “Cause” or a resignationwithout “Good Reason,” the executive will receive his accrued but unpaid basesalary and annual bonus.

 

“Cause” is defined ineach of the employment agreements as the executive’s (i) indictment inconnection with a crime involving moral turpitude or any felony, whichmaterially adversely affects our company or his ability to perform the dutiesof his employment; (ii) conviction of, or pleading of guilty or no-contestby, to any felony; (iii) dishonesty, fraud, unethical or illegal act,misappropriation or embezzlement which does (or would reasonably be likely to)materially damage our company or our company’s reputation; (iv) willful ordeliberate material violations of his obligations to our company; or (v) materialbreach of any of the terms or conditions of his employment agreement, subjectin the case of (iv) and (v) above, a 20 day cure period. No act orfailure to act by the executive will be considered willful unless it is done,or omitted to be done, by the executive in bad faith or without reasonablebelief that such action or omission was in the best interests of our company.Any act, or failure to act by an executive, based on authority given by ourcompany’s Chief Executive Officer or pursuant to a resolution duly adopted bythe Board or based upon the advice of counsel of our company will beconclusively presumed to be in good faith and in the bests interests of ourcompany.

 

“Good Reason” is definedin each of the employment agreements as: (i) a material diminution of hisposition, authority, duties or responsibilities (including any material adversechange to his title); (ii) a material decrease in his base salary orannual bonus opportunity or other material benefits, other than in connectionwith such a reduction occasioned by our

 

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company’s businessconditions or prospects and applicable to all similarly situated company management;(iii) our company relocates his principal place of employment to alocation in excess of 40 miles from the principal place of his employment as ofthe date of the applicable employment agreement; and (iv) any materialviolation of the applicable employment agreement by our company of a contractof employment with the executive, subject in the case of (i) — (iv) aboveto a 20 day cure period.

 

The following table showsthe estimated amount of payments and benefits that would be provided by us to ourNamed Executive Officers under the plans and agreements described aboveassuming that their employment was terminated as of December 31, 2008 forvarious reasons as described below:

 
| ** **                               | ** ** | **Reason  for Termination of Employment**                |
|------------------------------------------|------------|----------------------------------------------------------|
| **Named Officer and  Nature of Payment** | ** ** | **Termination  by Executive  without Good  Reason  ($)** | ** ** | **Termination  by Us without  Cause or  Termination by  Executive for  Good Reason  ($)** | ** ** | **Cause  ($)** | ** ** | **Death  ($)** | ** ** | **Disability  ($)** | ** ** | **Termination  in connection  with a Change  of Control  ($)** | ** ** |
| Michael J.  Barrist                      |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  payment                      |       | 8,984                                                    | (1) | 4,520,388 | (2) | 8,984 | (1) | 12,366,308 | (2)(3) | 4,520,388 | (2) | 4,520,388 | (2)(4) |
| Cost of  continuation of benefits        |       | —                                                   |   | 44,011 | (5) | — |   | 44,011 | (5) | 44,011 | (5) | 44,011 | (5) |
| Effect on stock  awards                  |       |                                                     | (10) |   | (10) |   | (11) |   | (10) |   | (10) |   | (10) |
|                                     |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| John R. Schwab                           |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  payment                      |       | 3,950                                                    | (6) | 1,211,215 | (7) | 3,950 | (6) | 4,229,379 | (7)(8) | 1,211,215 | (7) | 1,211,215 | (7)(4) |
| Cost of  continuation of benefits        |       | —                                                   |   | 35,686 | (9) | — |   | 35,686 | (9) | 35,686 | (9) | 35,686 | (9) |
| Effect on stock  awards                  |       |                                                     | (10) |   | (10) |   | (11) |   | (10) |   | (10) |   | (10) |
|                                     |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Stephen W.  Elliott                      |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  payment                      |       | 4,396                                                    | (6) | 1,347,986 | (7) | 4,396 | (6) | 4,706,963 | (7)(12) | 1,347,986 | (7) | 1,347,986 | (7)(4) |
| Cost of  continuation of benefits        |       | —                                                   |   | 24,762 | (9) | — |   | 24,762 | (9) | 24,762 | (9) | 24,762 | (9) |
| Effect on stock  awards                  |       |                                                     | (10) |   | (10) |   | (11) |   | (10) |   | (10) |   | (10) |
|                                     |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Joshua  Gindin, Esq.                |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  payment                      |       | 4,396                                                    | (6) | 1,347,986 | (7) | 4,396 | (6) | 4,706,963 | (7)(13) | 1,347,986 | (7) | 1,347,986 | (7)(4) |
| Cost of  continuation of benefits        |       | —                                                   |   | 24,762 | (9) | — |   | 24,762 | (9) | 24,762 | (9) | 24,762 | (9) |
| Effect on stock  awards                  |       |                                                     | (10) |   | (10) |   | (11) |   | (10) |   | (10) |   | (10) |
|                                     |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Steven Leckerman                         |       |                                                     |   |   |   |   |   |   |   |   |   |   |   |
| Total cash  payment                      |       | 7,394                                                    | (6) | 2,590,531 | (7) | 7,394 | (6) | 9,048,373 | (7)(14) | 2,590,531 | (7) | 2,590,531 | (7)(4) |
| Cost of  continuation of benefits        |       | —                                                   |   | 10,378 | (9) | — |   | 10,378 | (9) | 10,378 | (9) | 10,378 | (9) |
| Effect on stock  awards                  |       |                                                     | (10) |   | (10) |   | (11) |   | (10) |   | (10) |   | (10) |

 

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(1)    Represents amounts payableunder his employment agreement, representing accrued but unpaid base salary andannual bonus at December 31, 2008, payable in a lump sum as soon aspracticable after termination of employment.

(2)    Represents amounts payableunder his employment agreement. Includes $8,984 representing accrued but unpaidbase salary and annual bonus at December 31, 2008, payable in a lump sumas soon as practicable after termination of employment and $4,511,404representing Mr. Barrist’s base salary and target bonus for 2.875 yearsafter termination payable pro rata bi-weekly over 2.875 years form the date oftermination of employment. Assumes no base salary increases.

(3)    Includes $7,845,920 payable toMr. Barrist’s beneficiaries under our Executive Salary Continuation Planand $4,520,388 payable under Mr. Barrist’s employment agreement (SeeFootnote 2 regarding the amounts payable under Mr. Barrist’s employmentagreement.). The amounts to be paid under the Executive Salary ContinuationPlan would be payable to Mr. Barrist’s beneficiaries pro rata bi-weeklyover five years from the date of death.

(4)    Each executive’s employmentagreement provides that the executive is entitled to reimbursement of excisetax in connection with the termination payments to be made to such executiveupon termination of employment in connection with a change in control and anyfederal, state and local income tax and excise tax imposed on the reimbursedexcise tax. Assuming that a change in control involving NCO and the executive’stermination each occurred on December 31, 2008, there would be no taxliability calculated in accordance with Sections 280G and 4999 of the InternalRevenue Code.

(5)    Represents the estimated costto continue Mr. Barrist’s health and welfare benefits for the remainder ofthe initial term of his employment agreement following termination ofemployment, assuming no increase in premiums.

(6)    Represents amounts payableunder such executive’s employment agreement, representing accrued but unpaidbase salary and annual bonus at December 31, 2008, payable in a lump sumas soon as practicable after termination of employment.

(7)    Represents amounts payableunder such executive’s employment agreement. Includes $3,950, $4,396, $4,396and $7,394 payable to each of Messrs. Schwab, Elliott, Gindin andLeckerman, respectively, representing accrued but unpaid base salary and annualbonus at December 31, 2008, payable in a lump sum as soon as practicable aftertermination of employment, and $1,207,266 $1,343,591, $1,343,591and $2,583,137payable to each of Messrs. Schwab, Elliott, Gindin and Leckerman,respectively, representing base salary and annual bonus for two years aftertermination payable pro rata bi-weekly over 24 months from the date oftermination of employment. Assumes no base salary increases.

(8)    Includes $3,018,164 payable toMr. Schwab’s beneficiaries under our Executive Salary Continuation Planand $1,211,215 payable under Mr. Schwab’s employment agreement (SeeFootnote 7 regarding the amounts payable under Mr. Schwab’s employmentagreement.). The amounts to be paid under the Executive Salary ContinuationPlan would be payable to Mr. Schwab’s beneficiaries pro rata bi-weeklyover five years from the date of death.

(9)    Represents the estimated costto continue the executive’s health and welfare benefits for two years followingtermination of employment, assuming no increase in premiums.

(10)  For a 180-day period aftertermination, we would have had the right to repurchase both the vested andunvested portions of all outstanding restricted stock awards at the followingprices: the portion of such award that was (a) vested for their then FairMarket Value; and (b) not vested for the lesser of (i) the FairMarket Value as of the termination date, or (ii) 40 percent of the FairMarket Value as of the date of grant of the restricted shares. As of December 31,2008, in the case of termination for any reason, other than a Change inControl, 0, 11,480.9, 11,480.9, 11,480.9 and 14,648.0 restricted shares held byMessrs. Barrist, Schwab, Elliott, Gindin and Leckerman, respectively,would have been vested, and 20,803.1, 25,540.2, 25,852.2, 25,696.2 and 32,869.1shares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman,respectively, would have been unvested. In the case of termination inconnection with a Change in Control, 100 percent of the holder’s restrictedstock would have become vested upon termination. Accordingly, as of December 31,2008, Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman would haveheld 20,803.1, 37,021.1, 37,333.1, 37,177.1 and 47,517.1 vested shares of ourcommon stock, respectively. In the event that we did not exercise our buybackright described above, at the end of the 180-day buyback period, all of therestricted shares held by each executive would have become vested and suchexecutive would have had the right to retain all of the shares issued to himunder our Restricted Share Plan.

(11)  For a 180-day period aftertermination, we would have had the right to repurchase both the vested andunvested portions of all outstanding restricted stock awards for the lesser of (i) theFair Market Value as of the termination date, or (ii) 40 percent of theFair Market Value as of the date of grant of the restricted shares. As of December 31,2008, in the case of termination for any reason, other than a Change inControl, 0, 11,480.9, 11,480.9, 11,480.9 and

 

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14,648.0 restrictedshares held by Messrs. Barrist, Schwab, Elliott, Gindin and Leckerman,respectively, would have been vested, and 20,803.1, 25,540.2, 25,852.2,25,696.2 and 32,869.1 shares held by Messrs. Barrist, Schwab, Elliott,Gindin and Leckerman, respectively, would have been unvested. In the event thatwe did not exercise our buyback right described above, at the end of the180-day buyback period, all of the restricted shares held by each executivewould have become vested and such executive would have had the right to retainall of the shares issued to him under our Restricted Share Plan.

(12)  Includes $3,358,977 payable to Mr. Elliott’sbeneficiaries under our Executive Salary Continuation Plan and $1,347,986payable under Mr. Elliot’s employment agreement (See Footnote 7 regardingthe amounts payable under his employment agreement.). The amounts to be paidunder the Executive Salary Continuation Plan would be payable to Mr. Elliot’sbeneficiaries pro rata bi-weekly over five years from the date of death.

(13)Includes$3,358,977 payable to Mr. Gindin’s beneficiaries under our ExecutiveSalary Continuation Plan and $1,347,986 payable under Mr. Gindin’semployment agreement (See Footnote 7 regarding the amounts payable under hisemployment agreement.). The amounts to be paid under the Executive SalaryContinuation Plan would be payable to Mr. Gindin’s beneficiaries pro ratabi-weekly over five years from the date of death.

(14)  Includes $6,457,842 payable to Mr. Leckerman’sbeneficiaries under our Executive Salary Continuation Plan and $2,590,531payable under Mr. Leckerman’s employment agreement (See Footnote 7regarding the amounts payable under his employment agreement.). The amounts tobe paid under the Executive Salary Continuation Plan would be payable to Mr. Leckerman’sbeneficiaries pro rata bi-weekly over five years from the date of death.

 

**Termination or Change in ControlProvisions in Deferred Compensation Plan**

 

In addition to theamounts set forth in the table above, our Deferred Compensation Plan providesthat:

 

·      a participant is 100 percent vested as to amounts deferred by theparticipant; and

·      any company contributions will be 100 percent vested upon a participant’shaving three years of service, termination of employment due to death ordisability, reaching age 65 or upon a “change of control” (as defined in theDeferred Compensation Plan) of us.

 

A participant’s benefitsin the Deferred Compensation Plan are payable as soon as practicable followingtermination of employment or a “change of control” of the Company. Messrs. Barristand Schwab participate in our Deferred Compensation Plan. The following tableprovides information concerning amounts held (including both participantcontributions and company contributions) under our Deferred Compensation Planfor the benefit of our Named Executive Officers as of December 31, 2008:

 
| **Name**                  | ** ** | **Aggregate Balance at  December 31, 2008** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| Michael J.  Barrist       |       | $                                                | 20,241     |   |
| John R. Schwab            |       | 7,153                                            |       |
| Stephen W.  Elliott       |       | —                                           |       |
| Joshua  Gindin, Esq. |       | —                                           |       |
| Steven Leckerman          |       | —                                           |       |
|                           |            |                                                  |            |  |

 

**Director Compensation**

 

As of January 1,2008, our Board of Directors was comprised of Michael J. Barrist, Austin A.Adams, Edward A. Kangas, Leo J. Pound, James S. Rubin, Daniel J. Selmonosky andTarek N. Shoeb. Effective as of March 12, 2008, Messrs. Rubin,Selmonosky and Shoeb resigned and our Board appointed Messrs. Richard M.Cashin, Jr., David M. Cohen and Colin M. Farmer to fill the vacancies.

 

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As directors not employedby us or affiliated with One Equity Partners, sometimes referred to as “non-employeedirectors”, for 2008 each of Messrs. Adams, Kangas and Pound received anannual director fee of $100,000, payable in quarterly installments, plusreimbursement of expenses incurred in attending Board and committee meetings.In addition, Mr. Kangas received an annual fee of $50,000 for his servicesas lead director and Mr. Pound received an annual fee of $25,000 for hisservices as chairman of the audit committee, in each case payable in quarterlyinstallments. We offer optional health insurance coverage to non-employeedirectors and their families under our health insurance plan. In addition, on March 31,2008, Messrs. Adams, Kangas and Pound were each granted 1,291.9 restrictedshares of our Class A common stock. These restricted shares vest in 25percent increments beginning on the first anniversary of the date of grant.

 

The following table setsforth information concerning the compensation of each of our non-employeedirectors during 2008.

 
| **Name(1)**                  | ** ** | **Fees Earned  or Paid  in Cash  ($)** | ** ** | **Stock  Awards(2)  ($)** | ** ** | **All Other  Compensation(3)  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|----------------|------------|
| Austin A. Adams              |       | 100,000                                          |       | 9,345                     |       | 6,956                               |       | 116,301        |       |
| Edward A. Kangas             |       | 150,000                                          |       | 9,345                     |       | 6,956                               |       | 166,301        |       |
| Leo J. Pound                 |       | 125,000                                          |       | 9,345                     |       | 21,931                              |       | 156,276        |       |
| Richard M.  Cashin, Jr. |       | —                                           |       | —                    |       | —                              |       | —         |       |
| David M. Cohen               |       | —                                           |       | —                    |       | —                              |       | —         |       |
| Colin M. Farmer              |       | —                                           |       | —                    |       | —                              |       | —         |       |
| James S. Rubin               |       | —                                           |       | —                    |       | —                              |       | —         |       |
| Daniel J. Selmonosky         |       | —                                           |       | —                    |       | —                              |       | —         |       |
| Tarek N. Shoeb               |       | —                                           |       | —                    |       | —                              |       | —         |       |

 

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(1)   Mr. Barristhas been omitted from this table because he received no additional compensationfor serving as a director.

(2)   Representsthe amounts we recognized in 2008 for financial statement reporting purposespursuant to FAS 123R for restricted share awards granted under our RestrictedShare Plan, except that, in accordance with rules of the SEC, any estimatefor forfeitures is excluded from and does not reduce, such amounts. The fullgrant date fair value, under FAS 123R, of restricted stock awarded to each of Messrs. Adams,Kangas, and Pound was $41,000. Generally, the full grant date fair value is theamount we would recognize for financial statement reporting purposes over theaward’s vesting schedule. As of December 31, 2008, the number of unvestedrestricted shares held by each of Messrs. Mr. Adams, Kangas and Poundwas 3,371.4250 shares.

(3)   Asa condition to the grant of an award under our Restricted Share Plan, therecipient is required to make an election to include in the recipient’s currentyear income the fair market value, as of the date of grant, of the restrictedshares pursuant to Internal Revenue Code Section 83(b). The amountreported represents the amount that we pay the recipient as reimbursement forthe income taxes that the recipient incurs as a result of making the 83(b) election,as well as any additional taxes imposed as a result of the payment. In the caseof Mr. Pound, also includes $14,975 that we paid for health insurance onbehalf of the director and his family.

 

**Compensation Committee Interlocks and Insider Participation**

 

In 2008, the CompensationCommittee consisted of Messrs. Adams, Kangas and Farmer. Mr. Farmerreplaced Mr. Shoeb who resigned in March 2008. No person who servedas a member of the Compensation Committee during 2008 was a current or formerofficer or employee of the Company or, except as described below with respectto Messrs. Farmer and Shoeb, engaged in certain transactions with theCompany required to be disclosed by regulations of the SEC. Additionally, therewere no Compensation Committee “interlocks” during 2008, which generally meansthat no executive officer of the Company served as a

 

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director or member of thecompensation committee of another entity, one of whose executive officersserved as a director or member of the Company’s Compensation Committee.

 

***Management Agreement.*** On November 15, 2006, we enteredinto a ten-year management agreement with One Equity Partners pursuant to whichOne Equity Partners provides business and organizational strategy and financialadvisory services. One Equity Partners is our principal shareholder. Messrs. Rubin,Selmonosky and Shoeb, our directors from 2006 until March 2008, wereManaging Directors at One Equity Partners. Mr. Cashin, our director from March 2008until March 2009, is Managing Partner of One Equity Partners. Messrs. Cohenand Farmer are Managing Directors at One Equity Partners and Mr. Brianceis a vice president at One Equity Partners. Pursuant to the managementagreement, we pay One Equity Partners $3.0 million per annum plus reimbursementof expenses. We do not know and cannot determine the approximate dollar valueof the interest of each of Messrs. Briance, Cashin, Cohen, Farmer, Rubin,Selmonosky and Shoeb in the management fees that we paid to One EquityPartners. We do not separately compensate One Equity Partners or its designatedrepresentatives on our Board of Directors for their services as directors, butOne Equity Partners may receive fees in connection with its role in specifictransactions in the future.

 

***Systems &Services Technologies, Inc.*** In January 2008, weacquired Systems & Services Technologies, Inc. (“SST”), athird-party consumer receivable servicer, for $17.7 million, consisting of acash payment of $10.6 million and the issuance of 29,884.7 shares of our Series A14% PIK Preferred Stock, referred to as Series A Preferred Stock, subjectto certain post-closing adjustments. SST was a wholly owned subsidiary ofJPMorgan Chase Bank, National Association. JPMorgan Chase Bank, NationalAssociation is an affiliate of One Equity Partners.

 

***AdditionalEquity Investment by Certain Stockholders and Management.***On February 29, 2008, we sold a total of 802,262 shares of our Series APreferred Stock, 37,738 shares of our Class L Common Stock and 1,012,262shares of our Class A Common Stock in a private placement to certain ofour existing stockholders, including members of management. The offering priceper share was $237.50 per share of Series A Preferred Stock, $247.50 pershare of Class L Common Sock and $10.00 per share of Class A CommonStock, which were the same prices at which we sold our equity as part of thefinancing of the Transaction in 2006. The aggregate cash purchase price was$210.0 million, and such proceeds were used to fund a portion of the OSIacquisition completed on February 29, 2008.

 

Set forth below is information concerning thosestockholders that purchased more than $120,000 of our securities in theFebruary 2008 private placement:

 
| **Purchaser**                     | ** ** | **Shares of  Company  Series A  Preferred  Stock** | ** ** | **Shares of  Company  Class L  Common  Stock** | ** ** | **Shares of  Company  Class A  Common  Stock** | ** ** | **Cash  Purchase  Price** | ** **  |
|-----------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------|-------------|
| One Equity  Partners II, L.P.     |       | 802,262                                                 |       | —                                              |       | 1,002,827                                           |       | $                         | 200,565,379 |   |
| OEP II  Co-Investors,L.P.         |       | —                                                  |       | 16,480                                              |       | 4,120                                               |       | 4,119,902                 |        |
| OEP II Partners  Co. Invest, L.P. |       | —                                                  |       | 16,859                                              |       | 4,215                                               |       | 4,214,719                 |        |
| Barrist Family  Foundation(1)     |       | —                                                  |       | 4,000                                               |       | 1,000                                               |       | 1,000,000                 |        |
|                                   |            |                                                         |            |                                                     |            |                                                     |            |                           |             |  |

 

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(1) The BarristFamily Foundation is a charitable trust of which Mr. Barrist is aco-trustee.

 

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On December 9, 2008,we sold a total of 40,746 shares of our Series B-1 Preferred Stock and1,369 shares of our Series B-2 Preferred Stock in a private placement tocertain of our existing stockholders. The offering price per share was $237.50per share of Series B-1 Preferred Stock and $237.50 per share of Series B-2Preferred Stock. The aggregate cash purchase price was $10.0 million.

 

Setforth below is information concerning those stockholders that purchased morethan $120,000 of our securities in the December 2008 private placement:

 
| **Purchaser**                     | ** ** | **Shares of  Company  Series B-1  Preferred  Stock** | ** ** | **Shares of  Company  Series B-2  Preferred  Stock** | ** ** | **Cash  Purchase  Price** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------|------------|
| One Equity  Partners II, L.P.     |       | 40,746                                                         |       | —                                                         |       | $                         | 9,677,124  |   |
| OEP II  Co-Investors,L.P.         |       | —                                                         |       | 800                                                            |       | 189,970                   |       |
| OEP II Partners  Co. Invest, L.P. |       | —                                                         |       | 569                                                            |       | 135,252                   |       |
|                                   |            |                                                                |            |                                                                |            |                           |            |  |

 

On March 25, 2009,we sold a total of 147,447.3 shares of our Series B-1 Preferred Stock and20,973.7 shares of our Series B-2 Preferred Stock in a private placementto certain of our existing stockholders. The offering price per share was$237.50 per share of Series B-1 Preferred Stock and $237.50 per share of Series B-2Preferred Stock. The aggregate cash purchase price was $40.0 million.

 

Setforth below is information concerning those stockholders that purchased morethan $120,000 of our securities in the March 2009 private placement:

 
| **Purchaser**                                                   | ** ** | **Shares of  Company  Series B-1  Preferred  Stock** | ** ** | **Shares of  Company  Series B-2  Preferred  Stock** | ** ** | **Cash  Purchase  Price** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------|------------|
| One Equity  Partners II, L.P.                                   |       | 147,447.3                                                      |       | —                                                         |       | $                         | 35,018,745 |   |
| OEP II  Co-Investors,L.P.                                       |       | —                                                         |       | 2,061.9                                                        |       | 489,709                   |       |
| OEP II Partners  Co. Invest, L.P.                               |       | —                                                         |       | 2,935.0                                                        |       | 697,068                   |       |
| Citigroup  Capital Partners II 2006  Citigroup Investment, L.P. |       | —                                                         |       | 3,570.6                                                        |       | 848,014                   |       |
| Citigroup  Capital Partners II  Employee Master Fund, L.P.      |       | —                                                         |       | 4,010.8                                                        |       | 952,562                   |       |
| Citigroup  Capital Partners II  Onshore, L.P.                   |       | —                                                         |       | 1,810.7                                                        |       | 430,041                   |       |
| Citigroup  Capital Partners II  Cayman Holdings, L.P.           |       | —                                                         |       | 2,268.9                                                        |       | 538,861                   |       |
| Michael Barrist                                                 |       | —                                                         |       | 2,105.3                                                        |       | 500,000                   |       |
| Barrist Family  Foundation                                      |       | —                                                         |       | 2,105.3                                                        |       | 500,000                   |       |
|                                                                 |            |                                                                |            |                                                                |            |                           |            |  |

 

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(1) TheBarrist Family Foundation is a charitable trust of which Mr. Barrist is aco-trustee.

 

***RegistrationRights Agreement.*** In connection with the Transaction, on November 15,2006, we also entered into customary registration rights agreements with theplacement agents of the original notes, for the benefit of the holders of theoriginal notes. The registration rights agreements provide that so long as J.P.Morgan Securities Inc. proposes to make a market in the notes as part of itsbusiness in the ordinary course, we must, within certain time periods, 

 

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file a market makingregistration statement and, subject to certain exceptions, keep the relatedprospectus current in order to enable J.P. Morgan Securities Inc. to continue itsmarket making activities with respect to the notes.

 

***OtherArrangements.*** One Equity Partners is managed by OEPHolding Corporation, a wholly owned indirect subsidiary of JP Morgan Chase &Co., referred to as JPM, and JPM is a client of ours. For the year ended December 31,2008, we received fees for providing services to JPM of $14.8 million. At December 31,2008, we had accounts receivable of $9,000 due from JPM.

 

JPMorgan Chase Bank,N.A., an affiliate of JPM, is a lender under our Credit Facility. The CreditFacility consists of substantially the same terms, including interest rates andcollateral, as those prevailing for comparable transactions for unrelatedparties, and does not involve more than the normal risk of uncollectibility orpresent other unfavorable features.

 

**Item 12.****                            SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

**EquityCompensation Plan Information**

 

The followingtable details information regarding the Company’s existing equity compensationplans as of December 31, 2008:

 
| ** **                                                  | ** ** | **(a)**                                                                                                                                             | ** ** | **(b)**                                                                                                      | ** ** | **(c)**                                                                                                                                                                                                          | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights(1)** | ** ** | **Weighted-  average exercise  price of  outstanding  options, warrants  and rights(1)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       | 308,779                                                                                                                                             |       | —                                                                                                       |       | 27,888                                                                                                                                                                                                           |       |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                              |       | —                                                                                                       |       | —                                                                                                                                                                                                           |       |
|                                                        |       |                                                                                                                                                |       |                                                                                                         |       |                                                                                                                                                                                                             |       |
| Total                                                       |       | 308,779                                                                                                                                             |       | —                                                                                                       |       | 27,888                                                                                                                                                                                                           |       |

 

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(1)          Representsrestricted share awards. These awards are issuable without the payment of anycash consideration by the holder.

 

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**SecurityOwnership of Certain Beneficial Owners and Management**

 

The followingtable summarizes the beneficial ownership of our voting common stock as of March 31,2009 for:

 

·                  eachperson who we know beneficially owns more than 5 percent of our common stock;

·                  eachdirector

·                  eachof the Named Executive Officers who appears in the Summary Compensation Table;and

·                  alldirectors and executive officers as a group.

 

As of March 31,2009, there were 2,936,885 shares of Class A common stock and 400,894shares of Class L common stock outstanding.

 
| ** **                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Shares Beneficially Owned (1)**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Name of Beneficial Owner**                                                                                                                                                                                                                                                                                                                    | ** ** | **Number of  Class L  Common Stock** | ** ** | **Percent of  Class L  Common Stock** | ** ** | **Number of  Class A  Common Stock** | ** ** | **Percent of  Class A  Common Stock** | ** ** | **Percent of  Combined  Class L and  Class A  Common Stock** | ** ** |
| One Equity Partners II, L.P,  OEP II Co-Investors, L.P.  OEP II Partners Co-Invest, L.P.  OEP General Partners II, L.P.  OEP Co-Investors Management II, Ltd.  OEP II Partners Co-Invest, G.P., Ltd.

OEP Holding  Corporation  c/o One Equity Partners

320 Park Avenue, 18th Floor  New York, NY 10022 (2) |       | 129,294                                             |       | 32.3 | % | 2,560,206 |   | 87.2 | % | 80.6 | % |
| Citigroup Capital Partners II 2006  Citigroup Investment, L.P.,

Citigroup  Capital Partners II  Employee Master Fund, L.P.

Citigroup  Capital Partners II  Onshore, L.P.

Citigroup  Capital Partners II  Cayman Holdings, L.P.  c/o Citigroup Private Equity  388 Greenwich Street  32nd Floor  New York, NY 10013 (3)        |       | 160,000                                             |       | 39.9 | % | 40,000 |   | 1.4 | % | 6.0 | % |
| Helzberg Angrist  Investors I, LLC (4)                                                                                                                                                                                                                                                                                                                         |       | 20,000                                              |       | 5.0 | % | 5,000 |   | * |   | * |   |
| Michael J.  Barrist (5)                                                                                                                                                                                                                                                                                                                                        |       | 67,262                                              |       | 16.8 | % | 37,619 |   | 1.3 | % | 3.1 | % |
| Austin A. Adams                                                                                                                                                                                                                                                                                                                                                |       | —                                              |       | — |   | 4,065 |   | * |   | * |   |
| Edward A. Kangas                                                                                                                                                                                                                                                                                                                                               |       | —                                              |       | — |   | 4,065 |   | * |   | * |   |
| Leo J. Pound                                                                                                                                                                                                                                                                                                                                                   |       | —                                              |       | — |   | 4,065 |   | * |   | * |   |
| Henry H. Briance  (2) (6)                                                                                                                                                                                                                                                                                                                                 |       | 129,294                                             |       | 32.2 | % | 2,560,206 |   | 87.2 | % | 80.6 | % |
| David M. Cohen  (2) (7)                                                                                                                                                                                                                                                                                                                                   |       | 129,294                                             |       | 32.2 | % | 2,560,206 |   | 87.2 | % | 80.6 | % |
| Colin M. Farmer  (2) (8)                                                                                                                                                                                                                                                                                                                                  |       | 129,294                                             |       | 32.2 | % | 2,560,206 |   | 87.2 | % | 80.6 | % |
| John R. Schwab                                                                                                                                                                                                                                                                                                                                                 |       | 460                                                 |       | * |   | 37,136 |   | 1.3 | % | 1.1 | % |
| Stephen W.  Elliott                                                                                                                                                                                                                                                                                                                                            |       | 1,660                                               |       | * |   | 37,748 |   | 1.3 | % | 1.2 | % |
| Joshua  Gindin, Esq. (9)                                                                                                                                                                                                                                                                                                                                  |       | 26,220                                              |       | 6.5 | % | 43,732 |   | 1.5 | % | 2.1 | % |
| Steven Leckerman                                                                                                                                                                                                                                                                                                                                               |       | 1,720                                               |       | * |   | 47,947 |   | 1.6 | % | 1.5 | % |
| All directors  and executive officers as a group (12 persons) (10)                                                                                                                                                                                                                                                                                             |       | 98,162                                              |       | 24.5 | % | 251,754 |   | 8.6 | % | 10.5 | % |

 

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*      Less than one percent.

(1)          The securities “beneficiallyowned” by a person are determined in accordance with the definition of “beneficialownership” set forth in the regulations of the SEC and, accordingly, includesecurities as to which the person has or shares voting or investment power.Shares of NCO voting common stock which a person has the right to acquirewithin 60 days of March 31, 2009 are deemed outstanding for computing theshare ownership and percentage ownership of the person having such right, butare not deemed outstanding for computing the percentage of any other person.The same shares may be beneficially owned by more than one person. Beneficialownership may be disclaimed as to certain of the securities. Fractional sharesare rounded to the nearest whole share.

 

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(2)          Includes 2,527,882shares of Class A common stock owned by One Equity Partners II, L.P. (“OEPII”), 44,930 shares of Class L common stock and 11,233 shares of Class Acommon stock owned by OEP II Co-Investors, L.P. (“OEP II Co”) and 84,364 sharesof Class L common stock and 21,091 shares of Class A common stockowned by OEP II Partners Co-Invest, L.P. (“OEP II Partners” and collectivelywith OEP II and OEP II Co, “OEP”). The general partner of OEP II is OEP GeneralPartners II, L.P. (“OEP General”). The general partner of OEP General is OEPHolding Corporation (“OEP Holding”). The general partner of OEP II Co is OEPCo-Investors Management II, Ltd. (“OEP Co-Investors”). The general partner ofOEP II Partners is OEP II Partners Co-Invest G.P., Ltd. (“OEP II Partners GP”).Messrs. Cohen and Farmer are managing directors of OEP Holding, OEPCo-Investors and OEP II Partners GP. Mr. Briance is a vice president ofOEP. Messrs. Briance, Cohen and Farmer may be deemed to beneficially ownthese shares, but disclaim beneficial ownership of such shares except to the extentof their respective pecuniary interest therein.

(3)          Includes 48,992 sharesof Class L common stock and 12,248 shares of Class A common stockheld by Citigroup Capital Partners II 2006 Citigroup Investment, L.P., 55,032shares of Class L common stock and 13,758 shares of Class A commonstock held by Citigroup Capital Partners II Employee Master Fund, L.P., 24,845shares of Class L common stock and 6,211 shares of Class A commonstock held by Citigroup Capital Partners II Onshore, L.P. and 31,131 shares of Class Lcommon stock and 7,783 shares of Class A common stock held by CitigroupCapital Partners II Cayman Holdings, L.P. Citigroup Private Equity LP is thegeneral partner of Citigroup Capital Partners II 2006 Citigroup Investment,L.P., Citigroup Capital Partners II Employee Master Fund, L.P., CitigroupCapital Partners II Onshore, L.P. and Citigroup Partners II Cayman Holdings,L.P.

(4)          All shares of Class Lcommon stock and Class A common stock are held by Helzberg AngristInvestors, I, LLC. Helzberg Angrist Capital, LLC is the manager ofHelzberg Angrist Investors I, LLC.

(5)          Includes: (i) 306shares of Class L common stock and 76 shares of Class A common stockowned by Mrs. Cheryl Lazarus which Mr. Barrist has the sole right tovote pursuant to an irrevocable proxy and for which he shares dispositive powerwith her; (ii) 8,442 shares of Class L common stock and 2,111 sharesof Class A common stock held in trust for the benefit of members of Mr. Barrist’sfamily for which Mr. Barrist is a co-trustee and (iii) 9,108 sharesof Class L common stock and 2,277 shares of Class A common stock heldby the Barrist Family Foundation, a charitable trust, for which Mr. Barristis co-trustee. Excludes 16,738 shares of Class L common stock and 4,184shares of Class A common stock held in trust for the benefit of Mr. Barrist’schildren, as to all of which shares Mr. Barrist disclaims beneficialownership. Mrs. Cheryl Lazarus is the sister of Michael J. Barrist. Mr. Barrist’saddress is c/o NCO Group, Inc., 507 Prudential Road, Horsham, Pennsylvania19044.

(6)          Mr. Briance, ourdirector, was designated by OEP. Mr. Briance is a vice president at OEP.Amounts disclosed for Mr. Briance are also included above in footnote 2. Mr. Briancedisclaims beneficial ownership of any shares beneficially owned by OEP, exceptto the extent of his pecuniary interest.

(7)          Mr. Cohen, ourdirector, was designated by OEP. Mr. Cohen is a managing director at OEPHolding, the general partner of OEP II General, the general partner of OEP II,and is a managing director of OEP Co-Investors and OEP II Partners GP. Amountsdisclosed for Mr. Cohen are also included above in footnote 2. Mr. Cohendisclaims beneficial ownership of any shares beneficially owned by OEP, exceptto the extent of his pecuniary interest.

(8)          Mr. Farmer, ourdirector, was designated by OEP. Mr. Farmer is a managing director at OEPHolding, the general partner of OEP II General, the general partner of OEP II,and is a managing director of OEP Co-Investors and OEP II Partners GP. Amountsdisclosed for Mr. Farmer are also included above in footnote 2. Mr. Farmerdisclaims beneficial ownership of any shares beneficially owned by OEP, exceptto the extent of his pecuniary interest.

(9)          Includes: (i) 16,738shares of Class L common stock and 4,184 shares of Class A commonstock held in trust for the benefit of Mr. Barrist’s children for which Mr. Gindinis co-trustee and (ii) 8,442 shares of Class L common stock and 2,111shares of Class A common stock held in trust for the benefit of members ofMr. Barrist’s family for which Mr. Gindin is co-trustee. Mr. Gindin’saddress is c/o NCO Group, Inc., 507 Prudential Road, Horsham, Pennsylvania19044.

(10)    Excludes 129,294 shares of Class Lcommon stock and 2,560,206 shares of Class A common stock described infootnote 2.

 

**Item 13.         CertainRelationships and Related Transactions, and Director Independence**

 

**Policywith Respect to Approval of Related Party Transactions**

 

Under its charter,our Audit Committee is responsible for reviewing and approving the terms andconditions of all transactions between us and any employee, officer, directorand certain of their family members and other related persons required to bereported under Item 404 of SEC Regulation S-K. In practice, related party transactionsare reviewed and approved by directors that do not have a direct or indirectinterest in such transaction. We have not adopted written policies andprocedures with respect to the approval of related party transactions.Generally, under the agreements governing our outstanding notes and bankindebtedness, we are prohibited from entering into transactions with affiliatesexcept upon terms that, taken as a whole, are materially not less favorable tous than could be obtained, at the time of such transaction, in a comparable arm’s-lengthtransaction with a person that is not such an affiliate.

 

The transactionsdescribed in “Item 11. Executive Compensation” under the heading “CompensationCommittee Interlocks and Insider Participation” are incorporated herein byreference.

 

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**Transactionswith Certain Clients**

 

Affiliates ofCitigroup are investors in us, and Citigroup is a client of ours. For the yearended December 31, 2008, we received fees for providing services toCitigroup of $69.5 million. At December 31, 2008, we had accountsreceivable of $3.3 million due from Citigroup. During the year ended December 31,2008, we purchased accounts receivable with a face value of $32.3 million for apurchase price of $1.4 million from an affiliate of Citigroup.

 

**Employmentof Related Persons**

 

We employ BrettLeckerman as a general manager of one of our collection units. Mr. Leckermanis the son of Steven Leckerman, an executive officer of ours. Mr. Leckermanreceived salary and bonus totaling $139,208 in 2008. Mr. Brett Leckermanalso received an automobile allowance in 2008. We believe that the compensationpaid to Mr. Brett Leckerman was comparable with compensation paid to otheremployees with similar levels of responsibility and years of service.

 

**Independenceof the Board of Directors**

 

Because our commonstock is not listed on any national securities exchange or inter-dealerquotation system, we are not required to comply with the listing standards ofsuch exchanges or quotation systems that require that a majority of an issuer’sdirectors be independent.

 

In evaluating theindependence of our directors, we use the definition of independence containedin the listing standards of The NASDAQ Stock Market LLC, referred to as Nasdaq,the national securities exchange upon which our common stock was listed priorto the Transaction. Though not formally considered by our Board given that oursecurities are not registered or traded on any national securities exchange,based upon the listing standards of Nasdaq, we believe that Messrs. Adams,Kangas and Pound are independent.

 

Under applicableNasdaq listing standards, a majority of the members of a company’s board ofdirectors must qualify as “independent,” unless the company is a controlledcompany. A controlled company is a company in which more than 50 percent of thevoting power is held by an individual, group or other company. We would qualifyas a controlled company because OEP owns approximately 80.6 percent of ourvoting common stock, and, as such, would not be required to have a majority ofthe members of our Board be independent.

 

Our Board hasthree standing committees: an Audit Committee, a Compensation Committee and aNominating and Corporate Governance Committee. The current members of the AuditCommittee are Messrs. Adams, Kangas, Pound and Cohen. The current membersof the Compensation Committee are Messrs. Adams, Kangas and Farmer. Thecurrent members of Nominating and Corporate Governance Committee are Messrs. Adams,Pound and Briance. Though not formally considered by our Board given that oursecurities are not registered or traded on any national securities exchange, basedupon the listing standards of Nasdaq, we believe that each current member ofthe Audit Committee, other than Mr. Cohen, the Compensation Committee,other than Mr. Farmer, and the Nominating and Corporate GovernanceCommittee, other than Mr. Briance is independent.

 

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**Item 14.         PrincipalAccounting Fees and Services**

 

**IndependentRegistered Public Accounting Firm Fees and Services**

 

The aggregate feesfor professional services rendered to us by PricewaterhouseCoopers LLP, ourcurrent independent registered public accounting firm, as of or for the yearended December 31, 2008 and 2007, were as follows:

 
| **Services Rendered (1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Audit fees                          |       | $        | 2,100,000  |     | $          | 2,204,000 |   |
| Audit-Related  fees                 |       | $        | 838,000    |     | $          | 482,000 |   |
| Tax fees                            |       | $        | 237,000    |     | $          | 305,000 |   |
| All other fees                      |       | $        | 20,000     |     | $          | 10,000 |   |

 

----

(1)    Theaggregate fees included in Audit Fees are fees billed *for* the fiscal year.

      The aggregate fees included in each of theother categories are fees billed *in*the fiscal year.

 

***AuditFees.*** The audit fees for 2008 and 2007 include fees forprofessional services rendered for the audit of the Company’s consolidatedfinancial statements, review of the interim consolidated financial statementsincluded in quarterly reports, and services that generally only the independentregistered public accounting firm can reasonably provide, such as statutoryaudits, consents and assistance with and review of documents filed with theSEC.

 

***Audit-RelatedFees.*** The audit-related fees for fiscal 2008 and 2007include fees for assurance and related services that are reasonably related tothe performance of the audit or review of the Company’s consolidated financialstatements and are not reported under “Audit Fees.” These services includeattest services that are not required by statute or regulation, andconsultations concerning financial accounting and reporting standards.Audit-related fees for 2008 and 2007 also include fees for SAS 70 engagements.

 

***TaxFees.*** Tax fees for 2008 and 2007 include fees forservices related to tax compliance, and tax planning and advice including taxassistance with tax audits. These services include assistance regarding federaland state tax compliance and advice, review of tax returns, and federal andstate tax planning.

 

The AuditCommittee has considered and determined that the services provided byPricewaterhouseCoopers LLP are compatible with PricewaterhouseCoopers LLPmaintaining its independence.

 

The AuditCommittee has adopted a policy that requires advance approval of all audit,audit-related, tax services and other services performed byPricewaterhouseCoopers LLP. The policy provides for pre-approval by the AuditCommittee, or the Chairman of the Audit Committee, of specifically definedaudit and non-audit services. Unless the specific service has been previouslypre-approved with respect to that year, the Audit Committee must approve thepermitted service before PricewaterhouseCoopers LLP is engaged to perform it.The Audit Committee pre-approved all of the audit and non-audit servicesprovided to the Company by PricewaterhouseCoopers LLP in fiscal 2008 and 2007.

 

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**PART IV**

 

**Item 15.         Exhibitsand Financial Statement Schedules.**

 

1.     List of Consolidated Financial Statements.The consolidated financial statements and the accompanying notes of NCO Group, Inc.,have been included in this Report on Form 10-K beginning on page F-1:

 

Reports ofIndependent Registered Public Accounting Firm

ConsolidatedBalance Sheets as of December 31, 2008 and 2007

 

        ConsolidatedStatements of Operations for the year ended December 31, 2008 (Successor),for the year ended December 31, 2007 (Successor), for the period from July 13,2006 through December 31, 2006 (Successor), and for the period from January 1,2006 through November 15, 2006 (Predecessor).

 

        ConsolidatedStatements of Stockholders’ Equity for the year ended December 31, 2008 (Successor),for the year ended December 31, 2007 (Successor), for the period from July 13,2006 through December 31, 2006 (Successor), and for the period from January 1,2006 through November 15, 2006 (Predecessor).

 

        ConsolidatedStatements of Cash Flows for the year ended December 31, 2008(Successor),for the year ended December 31, 2007 (Successor), for the period from July 13,2006 through December 31, 2006 (Successor), and for the period from January 1,2006 through November 15, 2006 (Predecessor).

 

Notes toConsolidated Financial Statements

 

2.     All financial statement schedules areomitted because the required information is not present or not present inamounts sufficient to require submission of the schedule or because theinformation required is included in the respective financial statements ornotes thereto contained herein.

 

3.     List of Exhibits filed in accordance withItem 601 of Regulation S-K. The warranties, representations and covenantscontained in the agreements, documents and other instruments included orincorporated by reference herein or which appear as exhibits hereto should notbe relied upon by buyers, sellers or holders of the company’s securities andare not intended as warranties, representations or covenants to any individualor entity except as specifically set forth in such agreements, documents andother instruments. The following exhibits are incorporated by reference in, orfiled with, this Report on Form 10-K. Management contracts andcompensatory plans, contracts and arrangements are indicated by “*”:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of  Merger, dated as of July 21, 2006, by and among Collect  Holdings, Inc., Collect Acquisition Corp. and NCO Group, Inc.  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K filed on July 25, 2006 (SEC File Number  000-21639)) (NCO Group, Inc. agrees to furnish supplementally to the  SEC, upon request, a copy of any omitted schedules or exhibits.) |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2                  |       | Agreement and Plan of Merger,  dated as of February 27, 2007, by and between NCO Group, Inc. and  Collect Holdings, Inc. (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067)  filed on June 26, 2007)                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.3                  |       | Agreement  and Plan of Merger by and among Outsourcing Solutions Inc., NCO  Group, Inc. and NCO Acquisition Sub, Inc. dated as of  December 11, 2007 (incorporated by reference to the Exhibits filed with  NCO Group, Inc.’s Annual Report on Form 10-K for the year ended December 31,  2007, filed on March 31, 2008 (SEC File Number 333-144067, 333-144067))                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.4                  |       | Agreement  and Plan of Merger by and among NCO Group, Inc., Systems &  Services Technologies Merger Corp., System & Services  Technologies, Inc. and JPMorgan Chase Bank, National Association dated  as of August 27, 2007 (incorporated by reference to the Exhibits filed  with NCO Group, Inc.’s Current Report on Form 8-K filed on  May 13, 2008 (SEC File Number 333-144067, 333-144068))                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.5                  |       | Amendment  No. 1 dated as of December 12, 2007 to the Agreement and Plan of  Merger by and among NCO Group, Inc., System & Services  Technologies Merger Corp., System & Services Technologies, Inc, and  JPMorgan Chase Bank, National Association (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K  filed on May 13, 2008 (SEC File Number 333-144067, 333-144068)) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1                  |       | Second  Amended and Restated Certificate of Incorporation of NCO Group, Inc., as  amended                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2                  |       | Amended  and Restated Bylaws of NCO Group, Inc. (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1                  |       | Indenture,  dated as of November 15, 2006, among NCO Group, Inc., the  Guarantors signatory thereto and The Bank of New York, as Trustee, with  respect to the Floating Rate Senior Notes due 2013 (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2                  |       | Indenture,  dated as of November 15, 2006, among NCO Group, Inc., the  Guarantors signatory thereto and The Bank of New York, as Trustee, with  respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007)                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3                  |       | Supplemental  Indenture, dated as of November 15, 2006, among NCO Group, Inc. and  The Bank of New York, as Trustee, with respect to the Floating Rate Senior  Notes due 2013 (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4                  |       | Supplemental  Indenture, dated as of November 15, 2006, among NCO Group, Inc. and  The Bank of New York, as Trustee, with respect to the                                                                                                                                                                                                                                                                                                                            |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | 11.875%  Senior Subordinated Notes due 2014 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.5                  |       | Second  Supplemental Indenture, dated as of February 27, 2007, among NCO  Group, Inc. and The Bank of New York, as Trustee, with respect to the  Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6                  |       | Second  Supplemental Indenture, dated as of February 27, 2007, among NCO  Group, Inc. and The Bank of New York, as Trustee, with respect to the  11.875% Senior Subordinated Notes due 2014 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.7                  |       | Third  Supplemental Indenture, dated as of February 27, 2007, among Collect  Holdings, Inc. and The Bank of New York, as Trustee, with respect to the  Floating Rate Senior Notes due 2013 (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.8                  |       | Third  Supplemental Indenture, dated as of February 27, 2007, among Collect  Holdings, Inc. and The Bank of New York, as Trustee, with respect to the  11.875% Senior Subordinated Notes due 2014 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.9                  |       | Registration  Rights Agreement, dated as of November 15, 2006, among NCO  Group, Inc., the Guarantors signatory thereto and Morgan  Stanley & Co. Incorporation, J.P. Morgan Securities Inc. and Banc of  America Securities LLP with respect to the Floating Rate Senior Notes due  2013 (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007)        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.10                 |       | Registration  Rights Agreement, dated as of November 15, 2006, among NCO  Group, Inc., the Guarantors signatory thereto and Morgan Stanley &  Co. Incorporation, J.P. Morgan Securities Inc. and Banc of America Securities  LLP with respect to the 11.875% Senior Subordinated Notes due 2013  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.11                 |       | Form of  144A and Regulation S Floating Rate Senior Notes due 2013 (contained in  Exhibit 4.1) (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.12                 |       | Form of  144A and Regulation S 11.875% Senior Subordinated Notes due 2014 (contained  in Exhibit 4.2) (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                                                                                     |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.13                 |       | 144A  Notation of Senior Guarantee by the Guarantors named therein, with respect to  the Floating Rate Senior Notes due 2013 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.14                 |       | Regulation  S Notation of Senior Guarantee by the Guarantors named therein, with respect  to the Floating Rate Senior Notes due 2013 (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.15                 |       | 144A  Notation of Senior Subordinated Guarantee by the Guarantors named therein,  with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.16                 |       | Regulation  S Notation of Senior Subordinated Guarantee by the Guarantors named therein,  with respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Registration Statement  on Form S-4 (333-144067) filed on June 26, 2007)                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.17                 |       | Registration  Rights Agreement, dated as of November 15, 2006, among Collect  Holdings, Inc., One Equity Partners II, L.P., OEP II Partners  Co-Investors, L.P., OEP II Partners Co-Invest, L.P., Michael Barrist and the  other non-OEP Investors named therein (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.18                 |       | Fourth  Supplemental Indenture, dated as of July 11, 2007, among NCO  Group, Inc., NCOP IX, LLC and The Bank of New York, as Trustee, with  respect to the Floating Rate Senior Notes due 2013 (incorporated by reference  to the Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4/A (333-144067) filed on July 13, 2007)                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.19                 |       | Fourth  Supplemental Indenture, dated as of July 11, 2007, among NCO  Group, Inc., NCOP IX, LLC and The Bank of New York, as Trustee, with  respect to the 11.875% Senior Subordinated Notes due 2014 (incorporated by  reference to the Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4/A (333-144067) filed on July 13, 2007)                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.20                 |       | Form of  Exchange Floating Rate Senior Note due 2013 (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4/A (333-144067) filed on July 13, 2007)                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.21                 |       | Form of  Exchange 11.875% Senior Subordinated Note due 2014 (incorporated by reference  to the Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4/A (333-144067) filed on July 13, 2007)                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.22                 |       | Fifth  Supplemental Indenture, dated as of February 29, 2008, among NCO  Group, Inc., the New Guarantors (as defined therein), and The Bank of  New York, as Trustee, with respect to the Floating Rate Senior Notes due                                                                                                                                                                                                           |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | 2013  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-1 (333-150885) filed on May 13,  2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.23                 |       | Fifth  Supplemental Indenture, dated as of February 29, 2008, among NCO  Group, Inc., the New Guarantors (as defined therein), and The Bank of  New York, as Trustee, with respect to the 11.875% Senior Subordinated Notes  due 2014 (incorporated by reference to the Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-1 (333-150885) filed  on May 13, 2008)                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                 |       | Credit  Agreement, dated as of November 15, 2006, among NCO Group, Inc. (as  survivor of the merger with Collect Acquisition Corp.), NCO Financial  Systems, Inc., the Subsidiary Guarantors, the Lenders and agents named  therein and Morgan Stanley Senior Funding, Inc., as administrative agent  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon  request, a copy of any omitted schedules or exhibits.) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2                 |       | Security  Agreement, dated November 15, 2006, made by Collect Acquisition Corp.,  NCO Financial Systems, Inc., Collect Holdings, Inc., the Subsidiary  Guarantors and the Other Grantors Identified Therein, to Morgan  Stanley & Co. Incorporated, as Collateral Agent (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.)                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3                 |       | Intellectual  Property Security Agreement, dated November 15, 2006, made by Collect  Acquisition Corp., NCO Financial Systems, Inc., Collect  Holdings, Inc., NCO Group, Inc. and the Subsidiary Guarantors in  favor of Morgan Stanley & Co. Incorporated, as Collateral Agent  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007) (NCO Group, Inc. agrees to furnish supplementally to the SEC, upon  request, a copy of any omitted schedules or exhibits.)             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4                 |       | Stockholders  Agreement, dated as of November 15, 2006, among Collect  Holdings, Inc., One Equity Partners II, L.P., OEP II Co-Investors, L.P.,  OEP II Partners Co-Invest, L.P., Michael Barrist, and the Rollover Investors,  Management Investors and Institutional Investors named therein (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits.)                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.5                |       | NCO  Group, Inc. Amended and Restated Restricted Share Plan (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-1 (333-150885) filed on May 13, 2008)                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.6                |       | Form of  Award Agreement pursuant to the NCO Group, Inc. Restricted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                  |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Share  Plan (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007)                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.7                |       | Employment  Agreement, dated as of November 15, 2006, between NCO Group, Inc.  and Michael J. Barrist (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.8                |       | Employment  Agreement, dated as of November 15, 2006, between NCO Group, Inc.  and Stephen W. Elliott (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.9                |       | Employment  Agreement, dated as of November 15, 2006, between NCO Group, Inc.  and Joshua Gindin (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.10               |       | Employment  Agreement, dated as of November 15, 2006, between NCO Group, Inc.  and Steven Leckerman, including the First Amendment to Employment Agreement  dated June 14, 2007 (incorporated by reference to Exhibits filed with  NCO Group, Inc.’s Registration Statement on Form S-4 (333-144067)  filed on June 26, 2007)                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.11               |       | Employment  Agreement, dated as of November 15, 2006, between NCO Group, Inc.  and John R. Schwab (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007)                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12                |       | Management  Agreement, dated as of November 15, 2006, between One Equity Partners  II, L.P. and Collect Holdings, Inc. (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007)                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13                |       | Rollover  Agreement, dated as of July 21, 2006, between Collect  Holdings, Inc. and Michael Barrist (incorporated by reference to  Exhibits filed with NCO Group, Inc.’s Registration Statement on  Form S-4 (333-144067) filed on June 26, 2007) (NCO Group, Inc.  agrees to furnish supplementally to the SEC, upon request, a copy of any  omitted schedules or exhibits). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14                |       | Joinder  and Amendment to Rollover Agreement, dated November 15, 2006, among  Michael Barrist, Michael and Natalie Barrist Trust, Annette H. Barrist and  the Annette H. Barrist Trust (incorporated by reference to Exhibits filed  with NCO Group, Inc.’s Registration Statement on Form S-4  (333-144067) filed on June 26, 2007)                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15                |       | Executive  Salary Continuation Agreement (incorporated by reference to the Exhibits  filed with NCO Group, Inc.’s Quarterly Report on Form 10-Q for the  quarter ending March 31, 1998 (File No. 0-21639), filed on  May 4, 1998)                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| *10.16               |       | Executive  Deferred Compensation Plan Basic Document (incorporated by reference to the  Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K  filed on January 6, 2005 (SEC File Number 000-21639))                                                                                                                                                                              |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.17               |       | Executive  Deferred Compensation Plan Adoption Agreement (incorporated by reference to  the Exhibits filed with NCO Group, Inc.’s Current Report on  Form 8-K filed on January 6, 2005 (SEC File Number 000-21639))                                                                                                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.18               |       | Rabbi  Trust Agreement with Putnam Fiduciary Trust Company (incorporated by  reference to the Exhibits filed with NCO Group, Inc.’s Current Report on  Form 8-K filed on January 6, 2005 (SEC File Number 000-21639))                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19                |       | Credit  Agreement, dated as of November 26, 2002, by and among NCOP  Capital, Inc. as Borrower and CFSC Capital Corp. XXXIV as Lender  (incorporated by reference to Exhibit 10.48 to NCO Portfolio  Management, Inc.’s Annual Report on Form 10-K for the year ended December 31,  2002, filed on March 13, 2003 (SEC File Number 000-32403))                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20                |       | Second  Amendment to Credit Agreement, dated as of June 30, 2005, by and among  NCOP Capital, Inc. as Borrower and CFSC Capital Corp. XXXIV as Lender  (incorporated by reference to the Exhibits filed with NCO Group, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2005, filed on November 14, 2005 (SEC File Number 000-21639))                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21                |       | Fee  Letter Agreement, dated November 15, 2006, between One Equity Partners  II, L.P., Collect Holdings, Inc. and Collect Acquisition Corp.  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Registration Statement on Form S-4 (333-144067) filed on June 26,  2007)                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22                |       | Stock  Subscription Agreement, dated as of November 14, 2006, by and among  Collect Holdings, Inc., One Equity Partners II, L.P., OEP II  Co-Investors, L.P. and OEP II Partners Co-Invest, L.P. and several other  individuals and entities listed on the signature page (incorporated by  reference to Exhibits filed with NCO Group, Inc.’s Registration  Statement on Form S-4 (333-144067) filed on June 26, 2007) (NCO  Group, Inc. agrees to furnish supplementally to the SEC, upon request, a  copy of any omitted schedules or exhibits) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.23                |       | Stock  Subscription Agreement, dated as of November 15, 2006, by and among  Collect Holdings, Inc. and the several individuals listed on the  signature page (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Registration Statement on Form S-4 (333-144067) filed  on June 26, 2007) (NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits)                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.24                |       | Credit  Agreement between NCOP Capital III, LLC and CVI GVF FINCO, LLC dated as of  August 31, 2007. (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 (file no. 333-144067, 333-144068), filed on  November 14, 2007)                                                                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.25                |       | Credit  Agreement between NCOP Capital IV, LLC and CVI GVF FINCO, LLC dated as of  August 31, 2007. (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 (file no. 333-144067, 333-144068),                                                                                                                                                                                                                                                                               |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | filed  on November 14, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26                |       | Second  Amended and Restated Exclusivity Agreement dated as of August 31, 2007  among NCOP Lakes, Inc., NCO Financial Systems, Inc., NCO Portfolio  Management, Inc., NCO Group, Inc., NCOP Capital, Inc., NCOP  Capital I, LLC, NCOP-CF II, LLC, NCOP/CF, LLC, NCOP Capital III, LLC, NCOP  Capital IV, LLC, CARVAL INVESTORS, LLC and CVI GVF FINCO, LLC. (incorporated  by reference to Exhibits filed with NCO Group, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2007 (file no.  333-144067, 333-144068), filed on November 14, 2007)                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27                |       | Limited  Liability Company Agreement of NCOP/CF II, LLC dated as of August 31,  2007 between NCOP Nevada Holdings, Inc. and CVI GVF FINCO, LLC.  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2007 (file no. 333-144067, 333-144068), filed on November 14, 2007)                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28                |       | First  Amended Credit Agreement dated as of February 8, 2008 by and among NCO  Group, Inc., NCO Financial Systems, Inc., certain guarantors,  Citizens Bank of Pennsylvania, and RBS Securities Corporation d/b/a RBS  Greenwich Capital, as lead arranger and bookrunner, and the Lenders  (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Annual Report on Form 10-K for the year ended December 31, 2007 (file  no. 333-144067, 333-144068), filed on March 31, 2008)                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29                |       | Security  Agreement Supplement dated as of February 29, 2008 made by NCO  Group, Inc., NCO Financial Systems, Inc., the Subsidiary Guarantors  and the Other Grantors identified therein to Citizens Bank of Pennsylvania,  as the Collateral Agent and Administrative Agent (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Annual Report on Form 10-K  for the year ended December 31, 2007 (file no. 333-144067, 333-144068),  filed on March 31, 2008) ( NCO Group, Inc. agrees to furnish  supplementally to the SEC, upon request, a copy of any omitted schedules or  exhibits.) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.30                |       | Intellectual  Property Security Agreement, dated February 29, 2008, made by the  persons listed on the signature pages in favor of Citizens Bank of  Pennsylvania, as the Collateral Agent (incorporated by reference to Exhibits  filed with NCO Group, Inc.’s Annual Report on Form 10-K for the  year ended December 31, 2007 (file no. 333-144067, 333-144068), filed on  March 31, 2008) (NCO Group, Inc. agrees to furnish supplementally  to the SEC, upon request, a copy of any omitted schedules or exhibits.)                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.31                |       | Subscription  Agreement dated as of February 27, 2008 by and among NCO  Group, Inc., One Equity Partners II, L.P., OEP II Co-Investors, OEP II  Partners Co-Invest L.P. and several other individuals and entities listed on  the signature pages thereto (incorporated by reference to Exhibits filed  with NCO Group, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2007 (file no. 333-144067, 333-144068), filed on  March 31, 2008)                                                                                                                                                      |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32                |       | Subscription Agreement dated as of December 8, 2008 by and among  NCO Group, Inc., One Equity Partners II, L.P., OEP II Co-Investors,  L.P., OEP II Partners Co-Invest, L.P. and several other individuals and  entities listed on the signature pages thereto (incorporated by reference  to Exhibits filed with NCO Group, Inc.’s Current Report on Form 8-K  filed on December 12, 2008 (file no. 333-144067, 333-144068))                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33                |       | Second  Amendment to Credit Agreement dated as of March 25, 2009 by and among  NCO Group, Inc., NCO Financial Systems, Inc., certain guarantors  under the Credit Agreement, Citizens Bank of Pennsylvania as the  administrative agent, Citizens Bank of Pennsylvania as sole issuing bank and  certain lenders (incorporated by reference to Exhibits filed with NCO Group, Inc.’s  Current Report on Form 8-K filed on March 26, 2009 (file no.  333-144067, 333-144068)) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34                |       | Subscription  Agreement dated as of March 25, 2009 by and among NCO Group, Inc.,  One Equity Partners II, L.P., OEP II Co-Investors, L.P., OEP II Partners Co-Invest,  L.P. and several other individuals and entities listed on the signature  pages thereto (incorporated by reference to Exhibits filed with NCO  Group, Inc.’s Current Report on Form 8-K filed on March 26,  2009 (file no. 333-144067, 333-144068))                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 12                   |       | Statement  of Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1                 |       | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Rule 15d-14(a) promulgated  under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1                 |       | Certification  of the Company’s Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2                 |       | Certification  of the Company’s Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                              |

 

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**SIGNATURES**

 

              Pursuant to the requirements of Section 13or 15(d) of the Securities and Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   |                       |   | NCO  GROUP, INC.                              |
|--------|----------------------------|--------|-----------------------------------------------|
|   |                       |   |                                          |
|   | Date: March 31,  2009 | By:    | /s/ Michael J. Barrist                        |
|   |                       |   |                                          |
|   |                       |   | Michael  J. Barrist, Chairman of the          |
|   |                       |   | Board,  President and Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **SIGNATURE**          | ** ** | **TITLE(S)**                                                                                                                              | ** ** | **DATE**            |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
|                   |       |                                                                                                                                      |       |                |
| /s/ Michael J. Barrist |       | Chairman of the Board,  President and Chief Executive Officer (Principal Executive Officer)                                               |       | March 31, 2009 |
| Michael J. Barrist     |       |                                                                                                                                      |       |
|                   |       |                                                                                                                                      |       |                |
| /s/ John R. Schwab     |       | Executive Vice  President, Finance, Chief Financial Officer and Treasurer (Principal  Financial Officer and Principal Accounting Officer) |       | March 31, 2009 |
| John R. Schwab         |       |                                                                                                                                      |       |
|                   |       |                                                                                                                                      |       |                |
| /s/ Austin A. Adams    |       | Director                                                                                                                                  |       | March 31, 2009 |
| Austin A. Adams        |       |                                                                                                                                      |       |                |
|                   |       |                                                                                                                                      |       |                |
| /s/ Henry H. Briance   |       | Director                                                                                                                                  |       | March 31, 2009 |
| Henry H. Briance       |       |                                                                                                                                      |       |                |
|                   |       |                                                                                                                                      |       |                |
| /s/ David M. Cohen     |       | Director                                                                                                                                  |       | March 31, 2009 |
| David M. Cohen         |       |                                                                                                                                      |       |                |
|                   |       |                                                                                                                                      |       |                |
| /s/ Colin M. Farmer    |       | Director                                                                                                                                  |       | March 31, 2009 |
| Colin M. Farmer        |       |                                                                                                                                      |       |                |
|                   |       |                                                                                                                                      |       |                |
| /s/ Edward A. Kangas   |       | Director                                                                                                                                  |       | March 31, 2009 |
| Edward A. Kangas       |       |                                                                                                                                      |       |                |
|                   |       |                                                                                                                                      |       |                |
| /s/ Leo J. Pound       |       | Director                                                                                                                                  |       | March 31, 2009 |
| Leo J. Pound           |       |                                                                                                                                      |       |                |

 

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#### **Table of Contents**

 

#### **INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

#### ** **

| Reports  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                  |   | F-2    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                       |   |   |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                                                                                                                                                                                         |   | F-5    |
|                                                                                                                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2008 and 2007,  for the period from July 13, 2006 through December 31, 2006  (Successor), and for the period from January 1, 2006 through  November 15, 2006 (Predecessor)                |   | F-6    |
|                                                                                                                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2008  and 2007, for the period from July 13, 2006 through December 31,  2006 (Successor), and for the period from January 1, 2006 through  November 15, 2006 (Predecessor) |   | F-7    |
|                                                                                                                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008 and 2007,  for the period from July 13, 2006 through December 31, 2006  (Successor), and for the period from January 1, 2006 through  November 15, 2006 (Predecessor)                |   | F-8    |
|                                                                                                                                                                                                                                                                                       |   |   |
| Notes  to Consolidated Financial Statements                                                                                                                                                                                                                                                |   | F-9    |

 

F-1

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### Tableof Contents

 

### **Report of Independent Registered Public Accounting Firm**

###  

To Board of Directors andStockholders of NCO Group, Inc:

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, stockholders’ equity, and cash flowspresent fairly, in all material respects, the financial position of NCO Group,Inc and its subsidiaries at December 31, 2008 and 2007, and the results oftheir operations and their cash flows for each of the two years in the periodended December 31, 2008 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Wealso have audited the adjustments to the 2006 successor period consolidatedfinancial statements (as of and for the period from July 13, 2006 (date ofinception) through December 31, 2006) to retrospectively reflect theeffects of the pooling of interests described in Note 2. In our opinion, suchadjustments are appropriate and have been properly applied. We were not engagedto audit, review, or apply any procedures to the 2006 successor periodconsolidated financial statements of the Company other than with respect to theadjustments and, accordingly, we do not express an opinion or any other form ofassurance on the 2006 successor period consolidated financial statements takenas a whole.

 

 
| /s/PricewaterhouseCoopers  LLP |   |
|--------------------------------|--------|
|                           |   |
| Philadelphia,  Pennsylvania    |   |
| March 31, 2009            |   |

 

F-2

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Table of Contents

 

### **Report of Independent Registered Public Accounting Firm**

###  

TheBoard of Directors and Stockholders of

NCOGroup, Inc.

 

Wehave audited, before the effects of the adjustments to retrospectively accountfor the “as if pooling-of-interests” transaction described in Note 2, theaccompanying consolidated statement of operations, stockholders’ equity andcash flows for the period July 13, 2006 (date of inception) to December 31,2006 (Successor Period) (the financial statements before the effects of theadjustments discussed in Note 2 are not presented herein) of NCO Group, Inc.(formerly known as Collect Holdings, Inc.).  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above, before the effects ofthe adjustments to retrospectively account for the “as if pooling-of-interests”transaction described in Note 2, present fairly, in all material respects, theconsolidated results of operations and cash flows of NCO Group, Inc.(formerly known as Collect Holdings, Inc.) for the period July 13,2006 (date of inception) to December 31, 2006 in conformity with U.S.generally accepted accounting principles.

 

 
|                        | /s/Ernst & Young LLP |
|-----------------------------|-------------------------------|
|                        |                          |
| Philadelphia,  Pennsylvania |                          |
| May 8,  2007           |                          |

 

F-3

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Tableof Contents

 

### **Report of Independent Registered Public Accounting Firm**

###  

TheBoard of Directors and Stockholders of

NCOGroup, Inc.

 

Wehave audited the accompanying consolidated statements of operations,stockholders’ equity, and cash flows for the period from January 1, 2006to November 15, 2006 (the Predecessor Period) of NCO Group, Inc. (aspredecessor to Collect Holdings, Inc.). These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audit provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated results of operations and cash flows of NCOGroup, Inc. (as predecessor to Collect Holdings, Inc.) for the periodfrom January 1, 2006 to November 15, 2006 (the Predecessor Period),in conformity with U.S. generally accepted accounting principles.

 

 
|                        | /s/Ernst & Young LLP |
|-----------------------------|-------------------------------|
|                        |                          |
| Philadelphia,  Pennsylvania |                          |
| May 8,  2007           |                          |

 

F-4

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Table of Contents

 

**NCOGROUP, INC.**

**ConsolidatedBalance Sheets**

**(Amountsin thousands, except per share amounts)**

 
| ** **                                                                                                                                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                           |       |                  |       |                  |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Current assets:                                                                                                                                                      |       |                  |       |                  |       |
| Cash and cash  equivalents                                                                                                                                           |       | $                     | 29,880     |                  | $          | 31,283 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts of $5,008 and $3,137, respectively                                                               |       | 218,649               |       | 183,444               |       |
| Purchased  accounts receivable, current portion, net of allowance for impairment of $123,804  and $24,962, respectively                                              |       | 70,006                |       | 72,617                |       |
| Deferred income  taxes                                                                                                                                               |       | 34,216                |       | 16,279                |       |
| Prepaid expenses  and other current assets                                                                                                                           |       | 66,595                |       | 32,744                |       |
| Total current  assets                                                                                                                                                |       | 419,346               |       | 336,367               |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Funds held on  behalf of clients                                                                                                                                     |       |                  |       |                  |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Property and  equipment, net                                                                                                                                         |       | 138,272               |       | 134,459               |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Other assets:                                                                                                                                                        |       |                  |       |                  |       |
| Goodwill                                                                                                                                                             |       | 564,617               |       | 614,744               |       |
| Trade name                                                                                                                                                           |       | 85,466                |       | 96,613                |       |
| Customer  relationships and other intangible assets, net of accumulated amortization                                                                                 |       | 333,951               |       | 280,102               |       |
| Purchased  accounts receivable, net of current portion                                                                                                               |       | 115,653               |       | 172,968               |       |
| Other assets                                                                                                                                                         |       | 44,334                |       | 42,746                |       |
| Total other  assets                                                                                                                                                  |       | 1,144,021             |       | 1,207,173             |       |
| Total assets                                                                                                                                                         |       | $                     | 1,701,639  |                  | $          | 1,677,999 |   |
|                                                                                                                                                                 |       |                  |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **            | ** ** | ** **            | ** ** |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Current  liabilities:                                                                                                                                                |       |                  |       |                  |       |
| Long-term debt,  current portion                                                                                                                                     |       | $                     | 30,559     |                  | $          | 24,644 |   |
| Income taxes  payable                                                                                                                                                |       | 3,543                 |       | —                |       |
| Accounts payable                                                                                                                                                     |       | 18,026                |       | 21,457                |       |
| Accrued expenses                                                                                                                                                     |       | 128,474               |       | 94,151                |       |
| Accrued  compensation and related expenses                                                                                                                           |       | 46,466                |       | 32,217                |       |
| Deferred  revenue, current portion                                                                                                                                   |       | 40,731                |       | 1,427                 |       |
| Total current  liabilities                                                                                                                                           |       | 267,799               |       | 173,896               |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Funds held on  behalf of clients                                                                                                                                     |       |                  |       |                  |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Long-term  liabilities:                                                                                                                                              |       |                  |       |                  |       |
| Long-term debt,  net of current portion                                                                                                                              |       | 1,048,517             |       | 903,052               |       |
| Deferred income  taxes                                                                                                                                               |       | 67,365                |       | 126,403               |       |
| Other long-term  liabilities                                                                                                                                         |       | 34,169                |       | 17,655                |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Minority  interest                                                                                                                                                   |       | 22,803                |       | 48,948                |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Commitments and  contingencies                                                                                                                                       |       |                  |       |                  |       |
|                                                                                                                                                                 |       |                  |       |                  |       |
| Stockholders’  equity:                                                                                                                                          |       |                  |       |                  |       |
| Preferred stock,  par value $0.01 per share, 7,500 and 6,000 shares authorized, respectively, 2,573 and 1,408 shares  issued and outstanding, respectively           |       | 26                    |       | 14                    |       |
| Class L  common stock, par value $0.01 per share, 800 and 400 shares authorized, respectively, 401 and 364 shares  issued and outstanding, respectively         |       | 4                     |       | 4                     |       |
| Class A  common stock, par value $0.01 per share, 4,500 and 2,750 shares authorized, respectively, 2,937 and 1,822 shares  issued and outstanding, respectively |       | 29                    |       | 18                    |       |
| Additional  paid-in capital                                                                                                                                          |       | 720,955               |       | 518,089               |       |
| Accumulated other  comprehensive (loss) income                                                                                                                       |       | (10,007               | )          | 2,835                 |       |
| Accumulated  deficit                                                                                                                                                 |       | (450,021              | )          | (112,915              | )          |
| Total  stockholders’ equity                                                                                                                                     |       | 260,986               |       | 408,045               |       |
| Total liabilities  and stockholders’ equity                                                                                                                     |       | $                     | 1,701,639  |                  | $          | 1,677,999 |   |

 

See accompanying notes.

 

F-5

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Table of Contents

 

**NCOGROUP, INC.**

**ConsolidatedStatements of Operations**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **Period from** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **July 13, 2006** | ** ** | **Period from** | ** ** |
| ** **                                    | ** ** | ** **            | ** ** | ** **            | ** ** | **(date of inception)** | ** ** | **January 1,** | ** ** |
| ** **                                    | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **through** | ** ** | **through** | ** ** |
| ** **                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                    | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Revenues:                                     |       |                  |       |                  |       |   |   |   |   |
| Services                                      |       | $                     | 1,492,110  |                  | $          | 1,131,924 |   | $ | 132,808 |   | $ | 875,338 |   |
| Portfolio                                     |       | 18,029                |       | 132,413               |       | 13,557 |   | 151,706 |   |
| Portfolio sales                               |       | 3,002                 |       | 21,093                |       | — |   | 22,757 |   |
| Total revenues                                |       | 1,513,141             |       | 1,285,430             |       | 146,365 |   | 1,049,801 |   |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Operating costs  and expenses:                |       |                  |       |                  |       |   |   |   |   |
| Payroll and  related expenses                 |       | 845,481               |       | 679,951               |       | 79,165 |   | 553,883 |   |
| Selling, general  and administrative expenses |       | 562,339               |       | 459,170               |       | 50,122 |   | 375,150 |   |
| Depreciation and  amortization expense        |       | 121,324               |       | 102,349               |       | 12,228 |   | 46,695 |   |
| Impairment of  intangible assets              |       | 289,492               |       | —                |       | 69,898 |   | — |   |
| Restructuring  charges                        |       | 11,600                |       | —                |       | — |   | 12,765 |   |
| Total operating  costs and expenses           |       | 1,830,236             |       | 1,241,470             |       | 211,413 |   | 988,493 |   |
| (Loss) income  from operations                |       | (317,095              | )          | 43,960                |       | (65,048 | ) | 61,308 |   |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Other income  (expense):                      |       |                  |       |                  |       |   |   |   |   |
| Interest and  investment income               |       | 1,091                 |       | 2,635                 |       | 344 |   | 1,836 |   |
| Interest expense                              |       | (94,831               | )          | (95,294               | )          | (14,978 | ) | (26,643 | ) |
| Other (expense)  income, net                  |       | (16,468               | )          | 3,608                 |       | 212 |   | 3,165 |   |
| Total other  income (expense)                 |       | (110,208              | )          | (89,051               | )          | (14,422 | ) | (21,642 | ) |
| (Loss) income  before income taxes            |       | (427,303              | )          | (45,091               | )          | (79,470 | ) | 39,666 |   |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Income tax  (benefit) expense                 |       | (71,947               | )          | (16,104               | )          | (3,522 | ) | 14,742 |   |
|                                          |       |                  |       |                  |       |   |   |   |   |
| (Loss) income  before minority interest       |       | (355,356              | )          | (28,987               | )          | (75,948 | ) | 24,924 |   |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Minority  interest                            |       | 18,250                |       | (2,735                | )          | (157 | ) | (3,890 | ) |
|                                          |       |                  |       |                  |       |   |   |   |   |
| Net (loss)  income                            |       | $                     | (337,106   | )                     | $          | (31,722 | ) | $ | (76,105 | ) | $ | 21,034 |   |

 

See accompanying notes.

 

F-6

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Table of Contents

 

**NCOGROUP, INC.**

**ConsolidatedStatements of Stockholders’ Equity**

**(Amountsin thousands)**

 
| ** **                                                                                          | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** ** | ** **  | **Accumulated**        | ** ** | ** **       | ** ** | **Retained**     | ** **  | ** **             | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|----------------|------------|------------|-------------|------------------------|------------|------------------|------------|------------------|-------------|------------------------|------------|-------------|------------|
| ** **                                                                                          | ** ** | ** **    | ** ** | **Class L** | ** ** | **Class A** | ** ** | **Additional** | ** ** | ** ** | ** **  | **Other**              | ** ** | ** **       | ** ** | **Earnings**     | ** **  | ** **             | ** ** | ** **  | ** ** |
| ** **                                                                                          | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common**       | ** ** | **Paid-in**    | ** ** | **Common** | ** **  | **Comprehensive**      | ** ** | **Deferred**     | ** ** | **(Accumulated** | ** **  | **Comprehensive**      | ** ** | ** **  | ** ** |
| ** **                                                                                          | ** ** | **Stock**     | ** ** | **Stock**        | ** ** | **Stock**        | ** ** | **Capital**    | ** ** | **Stock**  | ** **  | **Income (Loss)** | ** ** | **Compensation** | ** ** | **Deficit)**     | ** **  | **Income (Loss)** | ** ** | **Total**   | ** ** |
| ** **                                                                                          | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **     | ** ** | ** ** | ** **  | ** **             | ** ** | ** **       | ** ** | ** **       | ** **  | ** **             | ** ** | ** **  | ** ** |
| ***Predecessor***                                                                                   |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| **Balance,  January 1, 2006**                                                                  |       |          |       |             |       |             |       |           |       | 477,238    |        | 13,892                 |       | (4,658           | )          | 256,642          |        |                   |       | 743,114     |       |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Issuance of  common stock in connection with stock-based compensation plans                         |       |          |       |             |       |             |       |           |       | 4,513      |        | —                 |       | —           |       | —           |        |                   |       | 4,513       |       |
| Reclassification  of deferred compensation                                                          |       |          |       |             |       |             |       |           |       | (4,658     | )           | —                 |       | 4,658            |       | —           |        |                   |       | —      |       |
| Stock-based  compensation                                                                           |       |          |       |             |       |             |       |           |       | 7,057      |        | —                 |       | —           |       | —           |        |                   |       | 7,057       |       |
| Comprehensive  income, net of tax:                                                                  |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Net income                                                                                          |       |          |       |             |       |             |       |           |       | —     |        | —                 |       | —           |       | 21,034           |        | $                      | 21,034     |        | 21,034     |   |
| Other  comprehensive income (loss):                                                                 |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Foreign currency  translation adjustment                                                            |       |          |       |             |       |             |       |           |       | —     |        | 1,901                  |       | —           |       | —           |        | 1,901                  |       | 1,901       |       |
| Change in fair  value of foreign currency cash flow hedges, net of taxes of $956                    |       |          |       |             |       |             |       |           |       | —     |        | 1,526                  |       | —           |       | —           |        | 1,526                  |       | 1,526       |       |
| Net gains on  foreign currency cash flow hedges reclassified into earnings, net of taxes of  $1,628 |       |          |       |             |       |             |       |           |       | —     |        | (2,804                 | )          | —           |       | —           |        | (2,804                 | )          | (2,804      | )          |
| Total  comprehensive income                                                                         |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        | $                      | 21,657     |        |       |   |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| **Balance,  November 15, 2006**                                                                |       |          |       |             |       |             |       |           | ** ** | **$**      | **484,150** | ** **             | **$**      | **14,515**       | ** ** | **$**            | **—**  | ** **             | **$**      | **277,676** |       |   | ** ** | **$** | **776,341** | ** ** |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| ***Successor***                                                                                     |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Capitalization of  Company                                                                          |       | $             | 12         |             | $          | 4                |       | $              | 16         |       | $           | 395,968                |       |             |       | $                | —      |                   | $          | —      |       | $ | — |   |   |   | $ | 396,000 |   |
| SST pooling (note  3)                                                                               |       | —        |       | —           |       | —           |       | 106,413        |       |       |        | —                 |       | —           |       | (5,088           | )           |                   |       | 101,325     |       |
| Stock-based  compensation                                                                           |       | —        |       | —           |       | 2                |       | 47             |       |       |        | —                 |       | —           |       | —           |        |                   |       | 49          |       |
| Capital  contribution from JPM to SST                                                               |       | —        |       | —           |       | —           |       | 328            |       |       |        | —                 |       | —           |       | —           |        |                   |       | 328         |       |
| Comprehensive  income, net of tax:                                                                  |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Net loss                                                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | —                 |       | —           |       | (76,105          | )           | $                      | (76,105    | )           | (76,105    | ) |
| Other  comprehensive income (loss):                                                                 |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Foreign currency  translation adjustment                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | 244                    |       | —           |       | —           |        | 244                    |       | 244         |       |
| Change in fair  value of foreign currency cash flow hedges, net of taxes of $969                    |       | —        |       | —           |       | —           |       | —         |       |       |        | (1,548                 | )          | —           |       | —           |        | (1,548                 | )          | (1,548      | )          |
| Net losses on  foreign currency cash flow hedges reclassified into earnings, net of taxes of  $88   |       | —        |       | —           |       | —           |       | —         |       |       |        | 141                    |       | —           |       | —           |        | 141                    |       | 141         |       |
| Total  comprehensive loss                                                                           |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        | $                      | (77,268    | )           |       |   |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| **Balance,  December 31, 2006**                                                                | ** ** | **12**        | ** ** | **4**            | ** ** | **18**           | ** ** | **502,756**    |       |       | ** **  | **(1,163**             | **)**      | **—**       | ** ** | **(81,193**      | **)**       |                   | ** ** | **420,434** | ** ** |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Preferred stock  dividends                                                                          |       | 2             |       | —           |       | —           |       | (2             | )          |       |        | —                 |       | —           |       | —           |        |                   |       | —      |       |
| Stock-based  compensation                                                                           |       | —        |       | —           |       | —           |       | 394            |       |       |        | —                 |       | —           |       | —           |        |                   |       | 394         |       |
| Comprehensive  income, net of tax:                                                                  |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Capital  contribution from JPM to SST                                                               |       | —        |       | —           |       | —           |       | 14,941         |       |       |        | —                 |       | —           |       | —           |        |                   |       | 14,941      |       |
| Net loss                                                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | —                 |       | —           |       | (31,722          | )           | $                      | (31,722    | )           | (31,722    | ) |
| Other  comprehensive income (loss):                                                                 |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Foreign currency  translation adjustment                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | 4,711                  |       | —           |       | —           |        | 4,711                  |       | 4,711       |       |
| Change in fair  value of cash flow hedges, net of taxes of $1,272                                   |       | —        |       | —           |       | —           |       | —         |       |       |        | 2,362                  |       | —           |       | —           |        | 2,362                  |       | 2,362       |       |
| Net gains on cash  flow hedges reclassified into earnings, net of taxes of $1,656                   |       | —        |       | —           |       | —           |       | —         |       |       |        | (3,075                 | )          | —           |       | —           |        | (3,075                 | )          | (3,075      | )          |
| Total  comprehensive loss                                                                           |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        | $                      | (27,724    | )           |       |   |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| **Balance,  December 31, 2007**                                                                | ** ** | **14**        | ** ** | **4**            | ** ** | **18**           | ** ** | **518,089**    |       |       | ** **  | **2,835**              | ** ** | **—**       | ** ** | **(112,915**     | **)**       |                   | ** ** | **408,045** | ** ** |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Issuance of stock                                                                                   |       | 9             |       | —           |       | 10               |       | 219,702        |       |       |        | —                 |       | —           |       | —           |        |                   |       | 219,721     |       |
| Deemed dividend  to JPM for SST acquisition                                                         |       | —        |       | —           |       | —           |       | (17,500        | )          |       |        |                   |       |             |       |             |        |                   |       | (17,500     | )          |
| Preferred stock  dividends                                                                          |       | 3             |       | —           |       | —           |       | (3             | )          |       |        | —                 |       | —           |       | —           |        |                   |       | —      |       |
| Stock-based  compensation                                                                           |       | —        |       | —           |       | 1                |       | 667            |       |       |        | —                 |       | —           |       | —           |        |                   |       | 668         |       |
| Comprehensive  income, net of tax:                                                                  |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Net loss                                                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | —                 |       | —           |       | (337,106         | )           | $                      | (337,106   | )           | (337,106   | ) |
| Other  comprehensive income (loss):                                                                 |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| Foreign currency  translation adjustment                                                            |       | —        |       | —           |       | —           |       | —         |       |       |        | (6,569                 | )          | —           |       | —           |        | (6,569                 | )          | (6,569      | )          |
| Change in fair  value of cash flow hedges, net of taxes of $7,880                                   |       | —        |       | —           |       | —           |       | —         |       |       |        | (13,818                | )          | —           |       | —           |        | (13,818                | )          | (13,818     | )          |
| Net gains on cash  flow hedges reclassified into earnings, net of taxes of $4,302                   |       | —        |       | —           |       | —           |       | —         |       |       |        | 7,545                  |       | —           |       | —           |        | 7,545                  |       | 7,545       |       |
| Total  comprehensive loss                                                                           |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        | $                      | (349,948   | )           |       |   |
|                                                                                                |       |          |       |             |       |             |       |           |       |       |        |                   |       |             |       |             |        |                   |       |        |       |
| **Balance,  December 31, 2008**                                                                | ** ** | **$**         | **26**     | ** **       | **$**      | **4**            | ** ** | **$**          | **29**     | ** ** | **$**       | **720,955**            |       |             | ** ** | **$**            | **(10,007** | **)**                  | **$**      | **—**  | ** ** | **$** | **(450,021** | **)** |   | ** ** | **$** | **260,986** | ** ** |
|                                                                                                     |            |               |            |                  |            |                  |            |                |            |            |             |                        |            |                  |            |                  |             |                        |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

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Table of Contents

 

**NCOGROUP, INC**

**ConsolidatedStatements of Cash Flows**

**(Amountsin thousands)**

 
| ** **                                                                                                      | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **Period from** | ** ** | ** ** | ** ** |
| ** **                                                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **July 13, 2006** | ** ** | **Period from** | ** ** |
| ** **                                                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **(date of inception)** | ** ** | **January 1** | ** ** |
| ** **                                                                                                      | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **through** | ** ** | **through** | ** ** |
| ** **                                                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                                                                                      | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash flows from  operating activities:                                                                          |       |                  |       |                  |       |   |   |   |   |
| Net (loss)  income                                                                                              |       | $                     | (337,106   | )                     | $          | (31,722 | ) | $ | (76,105 | ) | $ | 21,034 |   |
| Adjustments to  reconcile (loss) income from operations to net cash provided by (used in) operating activities: |       |                  |       |                  |       |   |   |   |   |
| Depreciation and  amortization                                                                                  |       | 121,324               |       | 102,349               |       | 12,229 |   | 46,695 |   |
| Impairment of  intangible assets                                                                                |       | 289,492               |       | —                |       | 69,898 |   | — |   |
| Stock-based  compensation                                                                                       |       | 667                   |       | 394                   |       | 49 |   | 6,961 |   |
| Amortization of  deferred training asset                                                                        |       | 2,886                 |       | 2,402                 |       | — |   | 3,375 |   |
| Provision for  doubtful accounts                                                                                |       | 3,030                 |       | 4,806                 |       | — |   | 3,931 |   |
| Impairment of  purchased accounts receivable                                                                    |       | 98,892                |       | 24,962                |       | — |   | 7,909 |   |
| Noncash interest                                                                                                |       | 1,517                 |       | 8,605                 |       | 3,655 |   | 5,730 |   |
| Gain on sale of  purchased accounts receivable                                                                  |       | (3,002                | )          | (21,093               | )          | — |   | (22,757 | ) |
| Other                                                                                                           |       | 6,648                 |       | (3,072                | )          | 178 |   | 870 |   |
| Parent  remittance on behalf of SST                                                                             |       | —                |       | 4,781                 |       | 328 |   | — |   |
| Minority  interest                                                                                              |       | (18,250               | )          | 2,735                 |       | 275 |   | 6,164 |   |
| Deferred income  taxes                                                                                          |       | (75,015               | )          | (9,781                | )          | (4,174 | ) | 4,483 |   |
| Changes in  operating assets and liabilities, net of acquisitions:                                              |       |                  |       |                  |       |   |   |   |   |
| Accounts  receivable, trade                                                                                     |       | 11,765                |       | (28,632               | )          | (17,931 | ) | 16,035 |   |
| Other assets                                                                                                    |       | (9,012                | )          | (8,740                | )          | 9,943 |   | (12,693 | ) |
| Accounts payable  and accrued expenses                                                                          |       | (23,172               | )          | 3,395                 |       | (131 | ) | (3,055 | ) |
| Income taxes  payable                                                                                           |       | 4,599                 |       | (14,602               | )          | (3,002 | ) | 27,217 |   |
| Other long-term  liabilities                                                                                    |       | 18,470                |       | 7,208                 |       | (169 | ) | (2,227 | ) |
| Net cash provided by  (used in) operating activities                                                            |       | 93,733                |       | 43,995                |       | (4,957 | ) | 109,672 |   |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash flows from  investing activities:                                                                          |       |                  |       |                  |       |   |   |   |   |
| Purchases of  accounts receivable                                                                               |       | (126,547              | )          | (125,283              | )          | (29,709 | ) | (81,839 | ) |
| Collections  applied to principal of purchased accounts receivable                                              |       | 89,325                |       | 77,228                |       | 13,577 |   | 70,974 |   |
| Proceeds from  sales and resales of purchased accounts receivable                                               |       | 4,757                 |       | 44,161                |       | 2,801 |   | 30,551 |   |
| Purchases of  property and equipment                                                                            |       | (43,396               | )          | (26,041               | )          | (2,468 | ) | (40,795 | ) |
| Proceeds from  bonds and notes receivable                                                                       |       | 1,122                 |       | 6,097                 |       | 82 |   | 1,033 |   |
| Proceeds from  sale to minority interest                                                                        |       | —                |       | —                |       | — |   | 12,720 |   |
| Net cash paid  for acquisitions and related costs                                                               |       | (349,420              | )          | (8,881                | )          | (974,612 | ) | (8,590 | ) |
| Net cash used in  investing activities                                                                          |       | (424,159              | )          | (32,719               | )          | (990,329 | ) | (15,946 | ) |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash flows from  financing activities:                                                                          |       |                  |       |                  |       |   |   |   |   |
| Repayment of  notes payable                                                                                     |       | (35,476               | )          | (50,725               | )          | (4,823 | ) | (53,677 | ) |
| Borrowings under  notes payable                                                                                 |       | 21,691                |       | 47,116                |       | 5,096 |   | 17,670 |   |
| Borrowings in  connection with the Transaction                                                                  |       | —                |       | —                |       | 830,000 |   | — |   |
| Net borrowings  under (repayments of) revolving credit facility                                                 |       | 34,500                |       | 11,000                |       | (193,300 | ) | 58,800 |   |
| Repayment of  borrowings under senior term loan                                                                 |       | (10,745               | )          | (4,650                | )          | — |   | — |   |
| Borrowings under  senior term loan, net                                                                         |       | 134,135               |       | —                |       | — |   | — |   |
| Repayment of  convertible notes                                                                                 |       | —                |       | —                |       | — |   | (125,000 | ) |
| Payment of fees  to obtain debt                                                                                 |       | (4,317                | )          | (1,035                | )          | (24,055 | ) | (12 | ) |
| Investment in  subsidiary by minority interest                                                                  |       | 2,436                 |       | 2,359                 |       | 2,132 |   | 4,000 |   |
| Return of  investment in subsidiary to minority interest                                                        |       | (12,242               | )          | (6,934                | )          | (241 | ) | (1,597 | ) |
| Issuance of  stock, net                                                                                         |       | 219,722               |       | —                |       | 395,966 |   | 3,939 |   |
| Payment of  deemed dividend to JPM                                                                              |       | (17,500               | )          | —                |       | — |   | — |   |
| Net cash provided by  (used in) financing activities                                                            |       | 332,204               |       | (2,869                | )          | 1,010,775 |   | (95,877 | ) |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Effect of  exchange rate on cash                                                                                |       | (3,181                | )          | 2,173                 |       | 2,494 |   | (1,180 | ) |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                           |       | (1,403                | )          | 10,580                |       | 17,983 |   | (3,331 | ) |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash and cash  equivalents at beginning of the period                                                           |       | 31,283                |       | 20,703                |       | 2,720 |   | 23,716 |   |
|                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash and cash  equivalents at end of the period                                                                 |       | $                     | 29,880     |                  | $          | 31,283 |   | $ | 20,703 |   | $ | 20,385 |   |

 

See accompanying notes.

 

F-8

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements**

 

**1.****              Natureof Operations and Basis of Presentation:**

 

On November 15, 2006, NCOGroup, Inc. was acquired by and became a wholly owned subsidiary ofCollect Holdings, Inc., an entity controlled by One Equity Partners andits affiliates (“OEP”), a private equity investment fund wholly owned byJPMorgan Chase & Co. (“JPM”), with participation by Michael J.Barrist, Chairman, President and Chief Executive Officer of NCO Group, Inc.,certain other members of executive management and other investors (the “Transaction”).Under the terms of the merger agreement, NCO Group, Inc. shareholdersreceived $27.50 in cash, without interest, for each share of NCO Group, Inc.common stock that they held. On February 27, 2007, NCO Group, Inc.was merged with and into Collect Holdings, Inc. and the survivingcorporation was renamed NCO Group, Inc. (collectively with itssubsidiaries, the “Company” or “NCO”).

 

NCO is a holding company andconducts substantially all of its business operations through its subsidiaries.NCO is a leading global provider of business process outsourcing solutions,primarily focused on accounts receivable management (“ARM”) and customerrelationship management (“CRM”). NCO provides services through over 100 officesin the United States, Canada, the Philippines, Panama, the Caribbean, India,the United Kingdom, Australia and Mexico. The Company provides services to morethan 14,000 active clients, including many of the Fortune 500, supporting abroad spectrum of industries, including financial services, telecommunications,healthcare, retail and commercial, utilities, education, technology,transportation/logistics, government services and direct mail. These clientsare primarily located throughout the United States, Canada, the United Kingdom,Europe, Australia, Puerto Rico and Latin America.  The Company’s largest client during the yearended December 31, 2008, was in the telecommunications sector andrepresented 8.3 percent of the Company’s consolidated revenue for the yearended December 31, 2008.  TheCompany also purchases and collects past due consumer accounts receivable fromconsumer creditors such as banks, finance companies, retail merchants,utilities, healthcare companies, and other consumer-oriented companies.

 

The Company’s business consists ofthree operating segments: ARM, CRM and Portfolio Management.

 

**2.****              Accounting Policies:**

 

*Principlesof Consolidation:*

 

The consolidated financialstatements include the accounts of the Company and all subsidiaries andentities controlled by the Company. All intercompany accounts and transactionshave been eliminated.

 

On January 2, 2008, theCompany acquired Systems & Services Technologies, Inc. (“SST”), athird-party consumer receivable servicer. Prior to the acquisition, SST was awholly owned subsidiary of JPM. JPM also wholly owns OEP, which as describedabove has had a controlling interest in the Company since the Transaction on November 15,2006.

 

F-9

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Table of Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

**2.****              Accounting Policies(continued):**

 

*Principlesof Consolidation (continued):*

 

Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations” (“SFAS 141”) states that a “business combination”excludes transfers of net assets or exchanges of equity interests betweenentities under common control. SFAS 141 also states that transfers of netassets or exchanges of equity interests between entities under common controlshould be accounted for similar to the pooling-of-interests method (“as-ifpooling-of-interests”) in that the entity that receives the net assets or theequity interests initially recognizes the assets and liabilities transferred attheir carrying amounts in the accounts of the transferring entity at the dateof transfer. Because the Company and SST were under common control at the timeof the SST acquisition, the transfer of assets and liabilities of SST wereaccounted for at historical cost in a manner similar to a pooling of interests.For financial accounting purposes, the acquisition was viewed as a change inreporting entity and, as a result, required restatement of the Company’sfinancial statements for all periods subsequent to November 15, 2006, thedate of the Transaction and the date at which common control of the Company andSST by JPM commenced. Accordingly, the Company’s consolidated balance sheet asof December 31, 2007, and the consolidated statement of operations,consolidated statement of stockholders’ equity and consolidated statement ofcash flows for the year ended December 31, 2007 and for the period from July 13,2006 through December 31, 2006 include SST’s financial position as of December 31,2007, and its results of operations and cash flows for the year ended December 31,2007 and for the one month ended December 31, 2006.

 

The Company also considers theapplicability of Financial Accounting Standards Board (“FASB”) FinancialInterpretation No. (“FIN”) 46R (as revised), “Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51,” which would includeany variable interest entities that are required to be consolidated by theprimary beneficiary. The primary beneficiary is the entity that holds the majorityof the beneficial interests in the variable interest entity.  A variable interest entity is an entity forwhich the primary beneficiary’s interest in the entity can change with changesin factors other than the amount of investment in the entity.

 

The Company owns 50 percent of entities that purchaseportfolios of purchased accounts receivable, which it consolidates inaccordance with FIN 46R. Based on its evaluation of these entities, the Companyis the primary beneficiary.

 

*RevenueRecognition:*

 

Services:

 

ARM contingency fee revenue is recognized uponcollection of funds by NCO or its client. Fees for ARM contractual services arerecognized as services are performed and earned under service arrangements withclients where fees are fixed or determinable and collectibility is reasonablyassured.

 

CRM revenue is recognized based on the billable hoursof each representative as defined in the client contract. The rate per billablehour charged is based on a predetermined contractual rate. The contractual ratecan fluctuate based on certain pre-determined objective performance criteriarelated to quality and performance, reduced by any contractual performancepenalties the client may be entitled to, both as measured on a monthly basis.The impact of the performance criteria and penalties on the rate per billablehour is continually updated as revenue is recognized.

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.****              Accounting Policies(continued):**

 

*RevenueRecognition (continued):*

 

Under CRMperformance-based arrangements, the Company is paid by its customers based onachievement of certain levels of sales or other client-determined criteria. TheCompany recognizes performance-based revenue by measuring its actual resultsagainst the performance criteria specified in the contracts.

 

Deferredrevenue primarily relates to prepaid fees for ARM collection and letterservices for which revenue is recognized when the services are provided or thetime period for which the Company is obligated to provide the services hasexpired. The following summarizes the changes in the balance of deferredrevenue (amounts in thousands):

 
| Balance at  December 31, 2007       |   | $       | 1,428  |   |
|------------------------------------------|--------|---------|--------|--------|
| Acquisitions                             |   | 45,829  |   |
| Additions                                |   | 41,373  |   |
| Revenue  recognized                      |   | (42,392 | )      |
| Foreign currency  translation adjustment |   | (103    | )      |
| Balance at  December 31, 2008       |   | $       | 46,135 |   |

 

Portfolio:

 

The Company appliesAmerican Institute of Certified Public Accountants (“AICPA”) Statement ofPosition 03-3, “Accounting for Loans or Certain Securities Acquired in aTransfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences betweencontractual versus expected cash flows over an investor’s initial investment incertain loans when such differences are attributable, at least in part, tocredit quality.

 

The Company acquiresaccounts receivable in groups that are initially recorded at cost. All acquiredaccounts receivable have experienced deterioration of credit quality betweenorigination and the Company’s acquisition of the accounts receivable, and theamount paid for the accounts receivable reflects the Company’s determinationthat it is probable the Company will be unable to collect all amounts dueaccording to contractual terms of each receivable. The Company determineswhether each purchase of accounts receivable is to be accounted for as anindividual portfolio or whether multiple purchases will be combined based oncommon risk characteristics into an aggregated portfolio. Once the Companyestablishes an individual purchase or aggregated purchases as a portfolio, thereceivables in the portfolio are not changed, unless replaced, returned orsold. The Company considers expected collections, and estimates the amount andtiming of undiscounted expected principal, interest, and other cash flows(expected at acquisition) for each portfolio of accounts receivable. TheCompany determines nonaccretable difference, or the excess of the portfolio’scontractual principal over all cash flows expected at acquisition as an amountthat should not be accreted. The excess of the portfolio’s cash flows expectedto be collected over the amount paid is accretable yield. Accretable yield isrecognized into earnings, as Portfolio revenue in the statement of operations,over the useful life of the portfolio, based on an effective interest ratemethod.

 

At acquisition, theCompany derives an internal rate of return (“IRR”) based on the expectedmonthly collections over the estimated economic life of each portfolio ofaccounts receivable (typically up to seven years, based on the Company’s collectionexperience) compared to the original purchase price. Monthly collections on theportfolios are allocated between revenue and carrying value reduction based onapplying each portfolio’s effective IRR for the quarter to its carrying value.Over the life of a portfolio, the Company continues to estimate cash flowsexpected to be collected. The Company evaluates at the balance sheet datewhether the present value of its portfolios determined using the effectiveinterest rates for each portfolio has decreased, and if so, records a valuationallowance to maintain the original IRR. Any increase in actual or estimatedcash flows expected to be collected is first used to reverse any existingvaluation allowance for that portfolio, and any remaining increases in cashflows are recognized prospectively through an increase in the IRR. The updatedIRR then becomes the new benchmark for subsequent valuation allowance testing.

 

F-11

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.     Accounting Policies (continued):**

 

*RevenueRecognition (continued):*

 

Portfolio Sales:

 

The Company accounts for gains onsales of purchased accounts receivable under SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities.”Gains on sales are recognized as revenue and represent the difference betweenthe sales price and the present value of the future cash collections expectedfrom the receivables sold at the portfolio’s IRR at the time of sale.

 

The Company applies a financialcomponents approach. Generally, that approach focuses on control of each of thevarious retained or sold interests or liabilities in a given financial assetsale to conclude when a sale has actually occurred as compared to a merefinancing, and the accounting for any related rights retained and/or dutiescommitted to on an ongoing basis, including servicing. Under that approach,after a transfer of financial assets, an entity allocates a portion of theoriginal cost of the assets to the assets sold in determining any gain or loss,and to any servicing assets it retains, such as servicing rights or rights toresidual interests. Gain or loss is reported in the period of the transfer, netof any liabilities it has incurred or will incur in the future. Assets retainedare amortized over the appropriate useful life of the asset. If control has notbeen adequately transferred to the other party, the proceeds received aretreated as financing and no gain or loss is recorded at the time of thetransfer.

 

*FairValue Measurement:*

 

Effective January 1, 2008, the Company adoptedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS 157”) for financial assets and financial liabilities.Among other things, SFAS 157 requires enhanced disclosures about assets andliabilities carried at fair value (note 5). As defined in SFAS 157, fair valueis the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date (exit price). In connection with the evaluation of SFAS 157,the Company also evaluated the provisions of SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — Including an amendmentof FASB Statement No. 115” (“SFAS 159”). As of the January 1, 2008effective date, the Company elected not to apply SFAS 159 to any of itsexisting eligible assets or liabilities; therefore there was no impact on theCompany’s consolidated financial position, results of operations, or cashflows. The Company is currently evaluating the impact of the provisions of SFAS157 that relate to nonfinancial assets and nonfinancial liabilities, which iseffective for the Company in 2009.

 

*CreditPolicy:*

 

Management monitors its client relationships in orderto minimize the Company’s credit risk and assesses the likelihood of collectionbased on a number of factors including the client’s collection history andcredit-worthiness. The Company maintains a reserve for potential collectionlosses when such losses are deemed to be probable.

 

The Company has two types of arrangements under whichit collects its ARM contingency fee revenue. For certain clients, the Companyremits funds collected on behalf of the client net of the related contingencyfees while, for other clients, the Company remits gross funds collected onbehalf of clients and bills the client separately for its contingency fees.

 

The Company generally does not require collateral andit does not charge finance fees on outstanding trade receivables. In manycases, in the event of collection delays from ARM clients, management may, atits discretion, change from the gross remittance method to the net remittancemethod. The Company also maintains a reserve for deposits on debtor accountsthat may ultimately prove to have insufficient funds. Trade accounts receivableare written off to the allowances when collection appears highly unlikely.

 

F-12

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.     Accounting Policies (continued):**

 

*Cash andCash Equivalents:*

 

The Company considers allhighly liquid investments purchased with an initial maturity of three months orless to be cash equivalents. These financial instruments potentially subjectthe Company to concentrations of credit risk. The Company minimizes this riskby dealing with major financial institutions. The Company maintains depositaccounts with major financial institutions, and, at times, such deposits mayexceed FDIC insurance limits.

 

*Propertyand Equipment:*

 

Property and equipment isstated at cost, less accumulated depreciation. Depreciation is provided overthe estimated useful life of each class of assets using the straight-linemethod. Expenditures for maintenance and repairs are charged to expense asincurred. Renewals and betterments are capitalized. When property is sold orretired, the cost and related accumulated depreciation are removed from thebalance sheet, and any gain or loss on the transaction is included in thestatement of operations. Certain expenditures for software that is purchased orinternally developed for use by the Company are capitalized in accordance withAICPA Statement of Position 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use” and amortized using thestraight-line method over a period of five years.

 

*Long-LivedAssets:*

 

The Company periodicallyevaluates the net realizable value of long-lived assets, including property andequipment, internal use software, and certain identifiable definite-livedintangible assets, for impairment, based on the estimated undiscounted futurecash flows, whenever events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable.

 

*Goodwilland Other Intangibles:*

 

Goodwill represents theexcess of purchase price over the fair market value of net assets acquired,based on their respective fair values at the date of acquisition. Goodwill istested for impairment each year, and between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. The goodwill impairment test isperformed at the reporting unit level and involves a two-step approach, thefirst step identifies any potential impairment and the second step measures theamount of impairment, if applicable. The first test for potential impairmentuses a fair value based approach, whereby the fair value of a reporting unit’sgoodwill is compared to its carrying amount; if the fair value is less than thecarrying amount, the reporting unit’s goodwill would be considered impaired.Fair value estimates are based upon a combination of the market approach andincome approach.

 

Trade name includes theNCO trade name, representing the fair value of the NCO name, which is anindefinite-lived intangible asset and therefore not subject to amortization.Similar to goodwill, the NCO trade name is reviewed at least annually forimpairment. Trade name also includes the trade name acquired in connection withthe acquisition of Outsourcing Solutions, Inc. (“OSI”) (note 4). The OSItrade name is a definite-lived intangible asset and is amortized using thestraight-line method over a period of five years.

 

Other intangible assetsconsist primarily of customer relationships and non-compete agreements, whichare amortized over a range of five to seven years using the straight-linemethod (note 9).

 

*DeferredFinancing Fees:*

 

Deferred financing feesrelate to debt issuance costs incurred, which are capitalized and amortized tointerest expense over the term of the related debt using the effective interestmethod.

 

F-13

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.     Accounting Policies (continued):**

 

*Stock-basedCompensation:*

 

The Company accounts forstock-based compensation in accordance with FASB Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”), which is a revision of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation”. SFAS 123R requires that the cost ofall share-based payments to employees, including stock option grants, berecognized in the financial statements over the vesting period based on theirfair values.

 

On November 15,2006, in connection with the Transaction and in accordance with the terms ofthe equity awards, the vesting of all outstanding unvested options to purchasethe Company’s stock and restricted stock units was accelerated, and the Companyrecorded compensation expense of approximately $5.1 million for theacceleration in the Predecessor period.

 

*IncomeTaxes:*

 

The Company accounts for income taxes in accordancewith SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) whichrequires that deferred tax assets and liabilities be recognized using enactedtax rates for the effect of temporary differences between the book and taxbases of recorded assets and liabilities. SFAS 109 also requires that deferredtax assets be reduced by a valuation allowance if it is more likely than notthat some portion or all of the deferred tax asset will not be realized.Deferred taxes have not been provided on the cumulative undistributed earningsof foreign subsidiaries because such amounts are expected to be reinvestedindefinitely.

 

On January 1, 2007, the Company adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”) which clarifies the accounting for uncertainty in tax positions. FIN 48requires that the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition, be recognized in the financial statements. The adoption of FIN48 did not have a material impact on the Company’s financial position orresults of operations (note 13).

 

*ForeignCurrency Translation:*

 

The Company has foreign subsidiaries whose localcurrency has been determined to be the functional currency for that subsidiary.The assets and liabilities of these foreign subsidiaries have been translatedusing the current exchange rates, and the income and expenses have beentranslated using average historical exchange rates. The adjustments resultingfrom translation have been recorded separately in stockholders’ equity as “Othercomprehensive income (loss)” and are not included in determining consolidatednet (loss) income. As of December 31, 2008 and 2007, “Accumulated othercomprehensive income (loss)” included $(1.6) million and $5.0 million,respectively, of cumulative income (loss) from foreign currency translation.

 

*Derivative FinancialInstruments:*

 

The Company selectivelyuses derivative financial instruments to manage interest costs and minimizecurrency exchange risk. The Company does not hold derivatives for tradingpurposes. While these derivative financial instruments are subject tofluctuations in value, these fluctuations are generally offset by the value ofthe underlying exposures being hedged. The Company minimizes the risk of creditloss by entering into these agreements with major financial institutions. TheCompany accounts for its derivative financial instruments in accordance withSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” (“SFAS 133”) which requires companies to recognize all of theirderivative instruments as either assets or liabilities in the balance sheet atfair value.

 

F-14

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.     Accounting Policies (continued):**

 

*Derivative FinancialInstruments (continued):*

 

The Company is exposed toforeign currency fluctuations relating to its operations in foreign countries.In order to partially hedge cash flow exposure, the Company periodically entersinto forward exchange contracts in order to minimize the impact of currencyfluctuations on transactions and cash flows. The forward exchange contracts arerecorded at their fair value on the accompanying balance sheets and may bedesignated as cash flow hedges. If the forward exchange contracts aredesignated as cash flow hedges, changes in the fair value, to the extent thatthe hedge was effective, are recorded, net of tax, in “Other comprehensiveincome (loss),” until earnings are affected by the variability of the hedgedcash flows. Cash flow hedge ineffectiveness, defined as the extent that thechanges in fair value of the derivative exceed the variability of cash flows ofthe forecasted transaction, was recorded currently in the statement ofoperations. If the forward exchange contracts are not cash flow hedges, changesin their estimated fair value are reported as “Other income (expense)” in thestatement of operations (note 15).

 

The Company is alsoexposed to interest rate fluctuations relating to its floating rate long-termdebt. To manage this interest rate risk, the Company enters into interest rateswap agreements. The interest rate swap agreements are designated as cash flowhedges and recorded at their fair value on the accompanying balance sheets.Changes in the fair value of a cash flow hedge, to the extent that the hedge iseffective, are recorded, net of tax, in “Other comprehensive income (loss),”until earnings are affected by the variability of the hedged cash flows. Cashflow hedge ineffectiveness, defined as the extent that the changes in fairvalue of the derivative exceed the variability of cash flows of the forecastedtransaction, is recorded currently in the statement of operations (note 15).

 

The Company also entersinto interest rate cap contracts to manage interest rate risk relating to itsfloating rate long-term debt. These contracts are not cash flow hedges and,accordingly, changes in their estimated fair value are reported as “Otherincome (expense)” in the statement of operations.

 

The Company has certainnonrecourse debt relating to its purchased accounts receivable operations thatcontain embedded derivative instruments. The embedded derivatives are not cashflow hedges and, accordingly, changes in their estimated fair value arereported as “Interest expense” in the statement of operations. The embeddedderivatives are included in “Long-term debt” on the balance sheet because theyare not separable from the notes payable and they have the same counterparty(note 11).

 

*Allowancefor Doubtful Accounts:*

 

Allowances for doubtful accountsare determined based on estimates of losses related to customer receivablebalances. In establishing the appropriate provision for customer receivablesbalances, the Company makes assumptions with respect to their futurecollectibility. The Company’s assumptions are based on an individual assessmentof a customer’s credit quality as well as subjective factors and trends,including the aging of receivable balances. Generally, these individual creditassessments occur at regular reviews during the life of the exposure andconsider factors such as a customer’s ability to meet and sustain theirfinancial commitments, a customer’s current financial condition and historicalpayment patterns. Once the appropriate considerations referred to above havebeen taken into account, a determination is made as to the probability ofdefault. An appropriate provision is made, which takes into account theseverity of the likely loss on the outstanding receivable balance. Our level ofreserves for our customer accounts receivable fluctuates depending upon all ofthe factors mentioned above, in addition to any contractual rights that allowus to reduce outstanding receivable balances through the application of futurecollections. If our estimate is not sufficient to cover actual losses, we wouldbe required to take additional charges to our earnings.

 

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**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**2.     Accounting Policies (continued):**

 

*Use ofEstimates:*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and theaccompanying notes. Actual results could differ from those estimates.

 

The application of SFAS No. 141,“Business Combinations” requires the measurement of fair values of purchasedassets and liabilities of an acquired entity. In connection with theTransaction, and other business combinations accounted for as a purchase,management makes additional estimates and assumptions in determining fair valuethat affect amounts reported in the financial statements and accompanyingnotes. The more significant financial statement items for which estimates andassumptions may be made include intangible assets, purchased accounts receivable,and nonrecourse debt.

 

In the ordinary course of accounting for purchasedaccounts receivable, estimates are made by management as to the amount andtiming of future cash flows expected from each portfolio. The estimated futurecash flow of each portfolio is used to compute the IRR for the portfolio, bothin the case of any increases in expected cash flows, or to compute impairmentor allowances in the case of decreases in expected cash flows. The IRR is usedto allocate collections between revenue and principal reduction of the carryingvalues of the purchased accounts receivable.

 

On an ongoing basis, the Company compares thehistorical trends of each portfolio, or aggregated portfolios, to projectedcollections. Future projected collections are then increased or decreased basedon the actual cumulative performance of each portfolio. Management reviews eachportfolio’s adjusted projected collections to determine if further upward ordownward adjustment is warranted. Management regularly reviews the trends incollection patterns and uses its reasonable best efforts to improve thecollections of under-performing portfolios. However, actual results will differfrom these estimates and a material change in these estimates could occurwithin one reporting period (note 6).

 

*Reclassifications:*

 

Certain amounts in the consolidated balance sheet at December 31,2007 have been reclassified for comparative purposes.

 

**3.     Restructuring Charges:**

 

In September 2005,the Company recorded restructuring charges related to the elimination ofcertain redundant facilities and severance costs. The balance of liabilitiesoutstanding at December 31, 2008 and 2007 was $1.7 million and $3.3million, respectively, which all related to lease costs. The Company expects topay the remaining balance through 2011.

 

In conjunction with theacquisitions of OSI and SST (note 4) and streamlining the cost structure of theCompany’s legacy operations, the Company recorded restructuring charges of$11.6 million during the year ended December 31, 2008. These chargesprimarily related to the elimination of certain redundant facilities andseverance costs. The balance of liabilities outstanding at December 31,2008 was $7.3 million. The company currently expects to pay this remainingbalance through 2013.

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**3.     Restructuring Charges (continued):**

 

The following presentsthe activity in the accruals recorded for restructuring charges (amounts inthousands):

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at  December 31, 2007 |       | $          | 3,259      |          | $          | —    |       | $ | 3,259 |   |
| Accruals                           |       | 6,474      |       | 5,126         |       | 11,600    |       |
| Cash payments                      |       | (2,858     | )          | (2,795        | )          | (5,653    | )          |
| Property and  equipment write-offs |       | (197       | )          | —        |       | (197      | )          |
| Balance at  December 31, 2008 |       | $          | 6,678      |          | $          | 2,331     |       | $ | 9,009 |   |

 

In connection with theTransaction, the Company recorded liabilities of $8.6 million in purchaseaccounting, for an exit plan the Company began to formulate prior to theTransaction date. These liabilities principally relate to facilities leases,severance and other costs. The following presents the activity in the accrualsrecorded for restructuring related expenses (amounts in thousands); the Companyexpects to pay the remaining balance through 2009:

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Balance at  December 31, 2007 |       | $          | 4,376      |          | $          | 971       |       | $ | 5,347 |   |
| Cash payments                      |       | (3,954     | )          | (682          | )          | (4,636    | )          |
| Leasehold  improvement write-offs  |       | (418       | )          | —        |       | (418      | )          |
| Balance at  December 31, 2008 |       | $          | 4          |          | $          | 289       |       | $ | 293 |   |

 

**4.     Business Combinations:**

 

On February 29,2008, the Company acquired OSI, a leading provider of business processoutsourcing services, specializing primarily in accounts receivable managementservices, for $339.0 million, subject to certain post-closing adjustments. Thepurchase price was financed in part by the issuance of 802,262 shares of theCompany’s Series A 14% PIK Preferred Stock, 37,738 shares of Class Lcommon stock and 1,012,262 shares of Class A common stock. The remainderof the purchase price was financed by borrowings of $139.0 million under theCompany’s amended senior credit facility (note 11).  The Company allocated $117.0 million of thepurchase price to customer relationships, $3.4 million to trade names, $634,000to non-compete agreements, and recorded goodwill of $213.8 million, which isnon-deductible for tax purposes, in the ARM segment. As a result of theacquisition of OSI, the Company expects to expand its current customer base andstrengthen its relationships with certain existing customers, expand itsportfolio base and reduce the cost of operations through economies of scale.Therefore, the Company believes the allocation of a portion of the purchaseprice to goodwill is appropriate.

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**4.     Business Combinations (continued):**

 

The following is anallocation of the purchase price to the assets acquired and liabilities assumed(amounts in thousands):

 

| Purchase price                          |   | $        | 339,011 |   |
|-----------------------------------------|--------|----------|---------|--------|
| Transaction  costs                      |   | 8,247    |    |
| Cash                                    |   | (26,069  | )       |
| Accounts  receivable                    |   | (51,707  | )       |
| Purchased  accounts receivable          |   | (3,630   | )       |
| Customer  relationships                 |   | (117,000 | )       |
| Trade name                              |   | (3,400   | )       |
| Non-compete  agreements                 |   | (634     | )       |
| Property and  equipment                 |   | (18,297  | )       |
| Other assets                            |   | (30,017  | )       |
| Current net  deferred tax assets        |   | (9,569   | )       |
| Long-term net  deferred tax liabilities |   | 14,081   |    |
| Deferred revenue                        |   | 45,439   |    |
| Accrued expenses  and other liabilities |   | 51,976   |    |
| Accrued  restructuring costs            |   | 15,323   |    |
|                                    |   |     |    |
| Goodwill                                |   | $        | 213,754 |   |

 

In connection with theOSI acquisition, the Company recorded liabilities of $15.3 million in purchaseaccounting, for an exit plan the Company began to formulate prior to theacquisition date. These liabilities principally relate to facilities leases,severance and other costs. The following presents the activity in the preliminaryaccruals recorded for restructuring related expenses (amounts in thousands);the Company expects to pay the remaining balance through 2012:

 
| ** **                         | ** ** | **Leases** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|
| Accruals                           |       | $          | 6,268      |          | $          | 9,055     |       | $ | 15,323 |   |
| Cash payments                      |       | (2,062     | )          | (7,856        | )          | (9,918    | )          |
| Balance at  December 31, 2008 |       | $          | 4,206      |          | $          | 1,199     |       | $ | 5,405 |   |

 

On January 2,2008, the Company acquired SST, a third-party consumer receivable servicer, for$13.4 million, subject to certain post-closing adjustments. The purchase priceconsisted of a cash payment of $8.1 million and the issuance of 22,484 sharesof the Company’s Series A 14% PIK Preferred Stock. As described in note 2,since the Company and SST were under common control by JPM at the time of theSST acquisition, the transfer of assets and liabilities of SST were accountedfor at historical cost in a manner similar to a pooling of interests. The $13.4million of consideration paid to JPM for SST and the return of $4.0 million ofcash that was not acquired was treated as dividends to JPM. In February 2009,the Company paid an additional $4.3 million, consisting of 7,400 shares of Series A14% PIK Preferred Stock and $2.6 million in cash, to JPM in accordance withpost closing adjustments. In “as-if pooling-of-interests” accounting, financialstatements of the previously separate companies for periods under commoncontrol prior to the combination are restated on a combined basis to furnishcomparative information. At December 31, 2007, SST added $49.4 million oftotal assets. For the year ended December 31, 2007, SST added revenue andnet loss of $70.0 million and $4.3 million, respectively. For the period from July 13,2006 through December 31, 2006, SST added revenue and net loss of $6.1million and $69.5 million, respectively. 

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**4.     Business Combinations (continued):**

 

The following summarizesthe unaudited pro forma results of operations, assuming the OSI acquisitiondescribed above occurred as of the beginning of the respective periods,including the combination of SST’s historical results. The unaudited pro formainformation is provided for information purposes only. It is based onhistorical information, and does not necessarily reflect the actual resultsthat would have occurred, nor is it indicative of future results of operationsof the consolidated entities (amounts in thousands):

 
| ** ** | ** ** | **For the year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| Revenue    |       | $                                                            | 1,584,526  |   | $ | 1,697,179 |   |
| Net loss   |       | (342,445                                                     | )          | (43,155 | ) |
|            |            |                                                              |            |  |  |  |  |

 

During the yearended December 31, 2008, the Company acquired several smaller companies,all of which were providers of ARM services, for an aggregate purchase price of$9.3 million, including an accrual for $886,000 for estimated earnout payments,resulting in customer relationships of $1.2 million and goodwill ofapproximately $8.1 million. In addition, during the year ended December 31,2008, the Company paid $6.2 million for earnout payments related to prioracquisitions.

 

On December 18,2006, the Company acquired the assets of Star Contact (BVI) Ltd. and CallCenter-Telemarketing Pro-Panama, S.A. (together “Star Contact”), a provider ofoutsourced, multi-lingual contact center and customer care services based inPanama City, Panama, for $36.2 million. The acquisition agreement contains aprovision for annual earnout payments to be made to the seller, for each of thetwo years following the acquisition, provided that certain performance measuresare met as of the end of each of the two years. During the year ended December 31,2007, the Company recorded $15.0 million of additional purchase price for thefirst annual earnout payment, which was paid during 2008.  For the year ended December 31, 2008,the performance measures were not met, therefore, no earnout payment is due tothe seller.

 

**5.     Fair Value Measurement:**

 

SFAS 157 requiresenhanced disclosures about assets and liabilities carried at fair value.Depending on the nature of the asset or liability, the Company uses variousvaluation techniques and assumptions when measuring fair value of its assetsand liabilities. In accordance with SFAS 157, the Company utilizes market dataor assumptions that market participants would use in pricing the asset orliability, including assumptions about risk and the risks inherent in theinputs to the valuation technique. These inputs can be readily observable (“Level1”), market corroborated (“Level 2”), or generally unobservable (“Level 3”).The significant majority of the fair value amounts included in the Company’scurrent period earnings resulted from Level 2 fair value methodologies; thatis, the Company is able to value the assets and liabilities based on observablemarket data for similar instruments (the “market approach”). The Companyapplied an income approach to amounts included in its current period earningsresulting from Level 3 fair value methodologies.

 

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**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**5.     Fair Value Measurement (continued):**

 

The followingtable sets forth, by level within the fair value hierarchy, the Company’sfinancial assets and liabilities that were measured at fair value on arecurring basis as of December 31, 2008. As required by SFAS 157,financial assets and liabilities are classified in their entirety based on thelowest level of input that is significant to the fair value measurement. TheCompany’s assessment of the significance of a particular input to the fairvalue measurement requires judgment and may affect the valuation of fair valueassets and liabilities and their placement within the fair value hierarchylevels.

 
| ** **                  | ** ** | **At fair value as of December 31, 2008** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **(amounts in thousands)**                                         | ** ** |
| ** **                  | ** ** | **Level 1**                                                             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                     |       |                                                                         |       |   |   |   |   |   |   |
| Forward exchange  contracts |       | $                                                                            | —     |   | $ | 923 |   | $ | — |   | $ | 923 |   |
| Interest rate  caps         |       | —                                                                       |       | 1 |   | — |   | 1 |   |
|                        |       |                                                                         |       |   |   |   |   |   |   |
| Liabilities:                |       |                                                                         |       |   |   |   |   |   |   |
| Interest rate  swaps        |       | —                                                                       |       | 13,180 |   | — |   | 13,180 |   |
| Forward exchange  contracts |       | —                                                                       |       | 11,360 |   | — |   | 11,360 |   |
| Embedded  derivatives       |       | —                                                                       |       | — |   | 3,742 |   | 3,742 |   |
|                        |       |                                                                         |       |   |   |   |   |   |   |
| Net liabilities             |       | $                                                                            | —     |   | $ | 23,616 |   | $ | 3,742 |   | $ | 27,358 |   |

 

Derivativesinclude interest rate swaps and foreign currency forward exchange contracts. Tovalue these derivatives, the Company obtains broker quotes from itscounterparties. The Company considers such quotes to be Level 2 measurements.To gain assurance that such quotes reflect market participant views, theCompany independently values its interest rate swaps, and validates therelevant exchange rates of its forward exchange contracts.

 

The contingentpayment provision embedded in the Company’s nonrecourse credit facility relatedto purchased accounts receivable are embedded derivatives. The Company valuesthese embedded derivatives using similar current period purchased accountsreceivable portfolio purchases’ underlying yields and cash flow changes.  Inputs used to value these embeddedderivatives are considered Level 3 measurements since they are unobservable.Changes in the fair market value of the embedded derivatives are recorded ininterest expense on the statement of operations.

 

The followingsummarizes the change in the fair value of the embedded derivatives (amounts inthousands):

 
| Balance at  December 31, 2007 |   | $      | 9,647  |   |
|------------------------------------|--------|--------|--------|--------|
| Accrued interest  additions        |   | 1,710  |   |
| Interest  payments                 |   | (3,107 | )      |
| Change in fair  value              |   | (4,508 | )      |
| Balance at  December 31, 2008 |   | $      | 3,742  |   |

 

For purposes ofvaluation adjustments to its interest rate swap and foreign currency exchangederivative positions under SFAS 157, the Company has evaluated liquiditypremiums that may be demanded by market participants, as well as the creditrisk of its counterparties and its own credit. The Company has consideredfactors such as the likelihood of default by itself and counterparties, its netexposures and remaining maturities in determining the appropriate fair valueadjustment to record. For the year ended December 31, 2008, the Company recorded$2.9 million in “other income (expense)” for these valuation adjustments.

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**6.       Purchased Accounts Receivable:**

 

PortfolioManagement and the U.K. and Australian divisions of ARM purchase defaultedconsumer accounts receivable at a discount from the contractual principalbalance. As of December 31, 2008, the carrying value of PortfolioManagement’s and ARM’s purchased accounts receivable were $181.4 million and$4.3 million, respectively. The total outstanding balance due, representing theoriginal undiscounted contractual amount less collections since acquisition,was $52.4 billion and $47.2 billion at December 31, 2008 and 2007,respectively.

 

The followingsummarizes the change in purchased accounts receivable (amounts in thousands):

 
| ** **                                                           | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                                           | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **                                                           | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                                                           | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                                           | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                                 |       |                                  |       |                  |       |   |   |   |   |
| Balance at  beginning of period                                      |       | $                                     | 245,585    |                  | $          | 244,100 |   | $ | — |   | $ | 237,807 |   |
| Purchases:                                                           |       |                                  |       |                  |       |   |   |   |   |
| Cash purchases                                                       |       | 126,547                               |       | 125,283               |       | 29,709 |   | 81,839 |   |
| Portfolios  acquired in business combinations                        |       | 3,630                                 |       | —                |       | 230,399 |   | — |   |
| Noncash  purchases (note 17)                                         |       | —                                |       | —                |       | — |   | 1,025 |   |
| Collections                                                          |       | (205,024                              | )          | (232,316              | )          | (26,850 | ) | (220,586 | ) |
| Revenue  recognized                                                  |       | 115,699                               |       | 155,088               |       | 13,273 |   | 149,612 |   |
| Proceeds from  portfolio sales and resales applied to carrying value |       | (1,755                                | )          | (23,068               | )          | (2,801 | ) | (7,794 | ) |
| Allowance for  impairment                                            |       | (98,892                               | )          | (24,962               | )          | — |   | (7,909 | ) |
| Other                                                                |       | (131                                  | )          | 1,460                 |       | 370 |   | 413 |   |
| Balance at end  of period                                            |       | $                                     | 185,659    |                  | $          | 245,585 |   | $ | 244,100 |   | $ | 234,407 |   |

 
| Purchased accounts receivable, current portion         |   | $       | 70,006  |    | $      | 72,617  |   |   |   |   |   |
|--------------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|--------|--------|--------|--------|
| Purchased  accounts receivable, net of current portion |   | 115,653 |    | 172,968 |   |    |   |   |   |
|                                                   |   | $       | 185,659 |    | $      | 245,585 |   |   |   |   |   |

 

In the ordinarycourse of purchasing portfolios of accounts receivable, the Company may sellaccounts from an acquired portfolio shortly after they were purchased. Theproceeds from these resales are essentially equal to, and applied against, thecarrying value of the accounts. Therefore, there is no gain recorded on theseresales. For the year ended December 31, 2008, there were no proceeds fromportfolio resales. For the year ended December 31, 2007, proceeds fromportfolio resales were $7.3 million. Proceeds from portfolio resales were $5.0million for the period from January 1, 2006 through November 15,2006, and $1.4 million for the period from July 13, 2006 through December 31,2006.

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**6.       Purchased Accounts Receivable(continued):**

 

PortfolioManagement sells portfolios of accounts receivable based on a low probabilityof payment under the Company’s collection platform and other criteria. Proceedsfrom sales above the remaining carrying value are recorded as revenue. Thefollowing summarizes sales proceeds, carrying value and revenue recorded(amounts in thousands):

 
| ** **               | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|--------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **               | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **               | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **               | ** ** | **For the year ended** | ** ** | **Through**           | ** ** | **Through** | ** ** |
| ** **               | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **               | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
| Proceeds from  sales     |       | $                                     | 4,757      |                  | $          | 36,876 |   | $ | 1,385 |   | $ | 25,584 |   |
| Less carrying  value     |       | 1,755                                 |       | 15,783                |       | 1,385 |   | 2,827 |   |
| Portfolio sales  revenue |       | $                                     | 3,002      |                  | $          | 21,093 |   | $ | — |   | $ | 22,757 |   |

 

For the periodfrom July 13, 2006 through December 31, 2006, no revenue was recordedsince these assets were carried at their fair market value as of the date ofthe Transaction.

 

The followingpresents the change in the allowance for impairment of purchased accountsreceivable accounted for under SOP 03-3 (amounts in thousands):

 
| ** **                      | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                      | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **                      | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                      | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                      | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
| Balance at  beginning of period |       | $                                     | 24,962     |                  | $          | — |   | $ | — |   | $ | 1,192 |   |
| Additions                       |       | 99,593                                |       | 25,422                |       | — |   | 8,492 |   |
| Recoveries                      |       | (701                                  | )          | (460                  | )          | — |   | (598 | ) |
| Other                           |       | (50                                   | )          | —                |       | — |   | 15 |   |
| Balance at end  of period       |       | $                                     | 123,804    |                  | $          | 24,962 |   | $ | — |   | $ | 9,101 |   |

 

Accretable yieldrepresents the excess of the cash flows expected to be collected during thelife of the portfolio over the initial investment in the portfolio. Thefollowing presents the change in accretable yield (amounts in thousands):

 
| ** **                                            | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                            | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **                                            | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                                            | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                            | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
| Balance at  beginning of period                       |       | $                                     | 366,584    |                  | $          | 465,451 |   | $ | — |   | $ | 288,935 |   |
| Additions                                             |       | 125,750                               |       | 105,490               |       | 478,724 |   | 106,145 |   |
| Revenue  recognized                                   |       | (115,699                              | )          | (155,088              | )          | (13,273 | ) | (149,612 | ) |
| Reclassifications  (to) from nonaccretable difference |       | (210,824                              | )          | (49,109               | )          | — |   | 16,953 |   |
| Foreign currency  translation adjustment              |       | 1,600                                 |       | (160                  | )          | — |   | 261 |   |
| Balance at end  of period                             |       | $                                     | 167,411    |                  | $          | 366,584 |   | $ | 465,451 |   | $ | 262,682 |   |

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**6.       Purchased Accounts Receivable(continued):**

 

During the years ended December 31,2008 and 2007, the Company purchased accounts receivable for a cost of $126.5million and $125.3 million, respectively, that had contractually requiredpayments receivable at the date of acquisition of $4.3 billion and $5.9billion, respectively, and expected cash flows at the date of acquisition of$248.7 million and $229.7 million, respectively. The Company purchased accountsreceivable for a cost of $81.8 million and $260.1 million, that hadcontractually required payments receivable at the date of acquisition of $3.1billion and $41.8 billion, and expected cash flows at the date of acquisitionof $187.6 million and $736.4 million, for the periods from January 1, 2006through November 15, 2006 and July 13, 2006 through December 31,2006, respectively.

 

**7.       Funds Held on Behalf of Clients:**

 

In the course of theCompany’s subsidiaries’ regular business activities as a provider of accountsreceivable management services, the Company receives clients’ funds arisingfrom the collection of accounts placed with the Company. These funds are placedin segregated cash accounts and are generally remitted to clients within 30days. Funds held on behalf of clients of $77.1 million and $70.5 million at December 31,2008 and 2007, respectively, have been shown net of their offsetting liabilityfor financial statement presentation.

 

**8.       Property and Equipment:**

 

Property andequipment, at cost, consisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **Estimated  Useful Life** | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land                           |       |                            |       | $                           | 70         |                        | $          | 70 |   |
| Buildings                      |       | 15 to 30 years                  |       | 6,693                       |       | 6,693                       |       |
| Computer  equipment            |       | 5 years                         |       | 111,960                     |       | 94,239                      |       |
| Computer  software             |       | 5 years                         |       | 74,823                      |       | 57,148                      |       |
| Leasehold  improvements        |       | 5 to 15 years                   |       | 41,798                      |       | 39,817                      |       |
| Furniture and  fixtures        |       | 5 to 10 years                   |       | 23,848                      |       | 21,329                      |       |
| Capital leases                 |       |                            |       | 5,456                       |       | —                      |       |
|                           |       |                            |       | 264,648                     |       | 219,296                     |       |
| Less accumulated  depreciation |       |                            |       | (126,376                    | )          | (84,837                     | )          |
|                           |       |                            |       | $                           | 138,272    |                        | $          | 134,459 |   |

 

Accumulateddepreciation includes $364,000 of accumulated amortization related to capitalleases. During the years ended December 31, 2008 and 2007, the Companyrecorded depreciation expense of $56.2 million and $52.0 million, respectively.The Company recorded depreciation expense of $36.4 million and $6.2 millionduring the periods from January 1, 2006 through November 15, 2006 andJuly 13, 2006 through December 31, 2006, respectively.

 

The Company leases two real estate facilities undercapital leases. These leases have ten year terms, expiring in 2018. Thefollowing represents the future minimum lease payments, by year and in theaggregate, under capital leases and the present value of net minimum leasepayments as of December 31, 2008 (amounts in thousands):

 
| 2009                                         |   | $      | 681    |   |
|----------------------------------------------|--------|--------|--------|--------|
| 2010                                         |   | 701    |   |
| 2011                                         |   | 722    |   |
| 2012                                         |   | 744    |   |
| 2013                                         |   | 766    |   |
| Thereafter                                   |   | 3,615  |   |
| Total minimum  payments                      |   |   | 7,229  |   |
| Less interest                                |   | (2,557 | )      |
| Present value of  net minimum lease payments |   | $      | 4,672  |   |
|                                              |        |        |        |        |  |

 

F-23

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**9.       Goodwill and Other Intangible Assets:**

 

SFAS No. 142,“Goodwill and Other Intangible Assets” requires goodwill to be allocated andtested at the reporting unit level. Goodwill is tested for impairment each yearduring the fourth quarter, and between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value of areporting unit below its carrying amount. NCO trade name is an indefinite-livedintangible asset and therefore not subject to amortization. Similar togoodwill, the trade name is reviewed at least annually for impairment. TheCompany’s reporting units are ARM, CRM and Portfolio Management.

 

Late in 2008, theCompany’s ARM and Portfolio Management reporting units experienced asignificant reduction in the collectability of both customer-placed andpurchased accounts receivable resulting from deteriorating economic conditions.Due to the expected impact of the economic environment, the Company reduced its2009 budgeted expectations for each of its reporting units. As a result, theCompany’s 2008 annual impairment test for goodwill and trade name indicatedthat the carrying values of all of its reporting units exceeded their fairvalues. Fair values were determined by using a combination of the marketapproach and income approach. The Company’s fair value calculations were basedon projected financial results that were prepared in connection with theCompany’s annual budget and forecasting process that included the expectedimpact of the current economic environment. The fair value calculations werealso based on other assumptions including long-term growth rates of 4 percentand weighted average cost of capital ranging from 13 percent to 14 percent.

 

As a result of theannual impairment testing, the Company recorded goodwill impairment charges of$275.5 million and trade name impairment charges of $14.0 million. The Companywas not required to record any impairment charges based upon the annualimpairment tests in 2007.

 

The followingsummarizes the changes in the Company’s reporting units’ goodwill (amounts inthousands):

 
| ** **                         | ** ** | **ARM** | ** ** | **Portfolio  Management** | ** ** | **CRM** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------|------------|---------------------------|------------|---------|------------|-----------|------------|
| Balance at  December 31, 2007 |       | $       | 330,933    |                      | $          | 155,693 |       | $         | 128,118    |   | $ | 614,744 |   |
| Goodwill  impairment               |       | (73,205 | )          | (155,693                  | )          | (46,597 | )          | (275,495  | )          |
| OSI acquisition                    |       | 213,754 |       | —                    |       | —  |       | 213,754   |       |
| Other                              |       | 11,367  |       | —                    |       | 247     |       | 11,614    |       |
| Balance at  December 31, 2008 |       | $       | 482,849    |                      | $          | —  |       | $         | 81,768     |   | $ | 564,617 |   |

 

In connection withthe Transaction, the Company allocated $96.6 million of the purchase price tothe fair value of the NCO name to its reporting units. The NCO trade name is anindefinite-lived intangible asset and therefore is not subject to amortization.At December 31, 2008, the balance of the NCO trade name was $82.6 million.

 

In connection withthe OSI acquisition, the Company allocated $3.4 million of the purchase priceto the fair value of certain trade names acquired in connection with the OSIacquisition, which are subject to amortization. At December 31, 2008, accumulated amortization of the OSI tradenames was $567,000.

 

F-24

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**9.       Goodwill and Other Intangible Assets(continued):**

 

Other intangible assetssubject to amortization consist of customer relationships and non-competeagreements. The following represents the other intangible assets subject toamortization (amounts in thousands):

 
| ** **              | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer  relationships |       | $                               | 450,827    |                            | $          | 119,409 |   | $ | 332,902 |   | $ | 55,547 |   |
| Non-compete  agreements |       | 4,006                           |       | 1,473                           |       | 3,372 |   | 625 |   |
| Total                   |       | $                               | 454,833    |                            | $          | 120,882 |   | $ | 336,274 |   | $ | 56,172 |   |

 

During the year ended December 31,2008 and 2007, the Company recorded amortization expense for these otherintangible assets of $64.5 million and $50.3 million, respectively. The Companyrecorded amortization expense for other intangible assets of $10.3 million and$5.9 million during the periods from January 1, 2006 through November 15,2006 and July 13, 2006 through December 31, 2006, respectively. Thefollowing represents the Company’s expected amortization expense for each ofthe next five years from these other intangible assets (amounts in thousands):

 

| **For the Years Ended** | ** ** | **Estimated**                 | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| **December 31,**                  | ** ** | **Amortization Expense** | ** ** |
| 2009                                   |       | $                             | 67,577     |   |
| 2010                                   |       | 66,437                        |       |
| 2011                                   |       | 66,074                        |       |
| 2012                                   |       | 61,895                        |       |
| 2013                                   |       | 55,560                        |       |
|                                        |            |                               |            |  |

 

**10.     Accrued Expenses:**

 

Accrued expensesconsisted of the following (amounts in thousands):

 
| ** **                                                                                          | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Derivative  instruments                                                                             |       | $                           | 24,540     |                        | $          | 3,686 |   |
| Accrued rent and  other related expense associated with the flood of the Fort Washington  locations |       | 11,100                      |       | 11,111                      |       |
| Accrued interest                                                                                    |       | 8,887                       |       | 10,510                      |       |
| Book overdrafts                                                                                     |       | 6,609                       |       | 4,408                       |       |
| Accrued contract  labor expenses                                                                    |       | 5,449                       |       | 3,797                       |       |
| Restructuring  costs                                                                                |       | 4,733                       |       | 7,213                       |       |
| Accrued  acquisition costs                                                                          |       | 5,201                       |       | 3,108                       |       |
| Customer  refundable fees                                                                           |       | 4,312                       |       | —                      |       |
| Accrued earnout  payment                                                                            |       | —                      |       | 14,775                      |       |
| Other accrued  expenses                                                                             |       | 57,643                      |       | 35,543                      |       |
|                                                                                                |       | $                           | 128,474    |                        | $          | 94,151 |   |

 

F-25

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

**11.  Long-Term Debt:**

 

Long-term debtconsisted of the following (amounts in thousands):

 
| ** **                        | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Senior term loan                  |       | $                           | 588,605    |                        | $          | 460,350 |   |
| Senior revolving  credit facility |       | 81,500                      |       | 47,000                      |       |
| Senior  subordinated notes        |       | 200,000                     |       | 200,000                     |       |
| Senior notes                      |       | 165,000                     |       | 165,000                     |       |
| Nonrecourse  credit facility      |       | 37,244                      |       | 53,742                      |       |
| Capital leases                    |       | 5,232                       |       | —                      |       |
| Other                             |       | 1,495                       |       | 1,604                       |       |
| Less current  portion             |       | (30,559                     | )          | (24,644                     | )          |
|                              |       | $                           | 1,048,517  |                        | $          | 903,052 |   |

 

The followingsummarizes the Company’s required debt payments (amounts in thousands):

 

| 2009       |   | $       | 30,559    |   |
|------------|--------|---------|-----------|--------|
| 2010       |   | 16,683  |      |
| 2011       |   | 92,102  |      |
| 2012       |   | 6,789   |      |
| 2013       |   | 730,010 |      |
| Thereafter |   | 202,933 |      |
|       |   | $       | 1,079,076 |   |

 

*SeniorCredit Facility:*

 

On November 15, 2006, the Company entered into a senior creditfacility (“Credit Facility”) with a syndicate of financial institutions. TheCredit Facility consisted of a $465.0 million term loan and a $100.0 millionrevolving credit facility. In connection with the OSI acquisition, in February 2008the Company amended the Credit Facility to add $139.0 million to the term loan.The Company is required to make quarterly principal repayments of $1.5 millionon the term loan until its maturity in May 2013, at which time itsremaining balance outstanding is due. The Company is also required to makeannual prepayments of 50 percent, 25 percent or zero percent of its excessannual cash flow, based on its leverage ratio. The revolving credit facilityrequires no minimum principal payments until its maturity in November 2011.The availability of the revolving credit facility is reduced by any unusedletters of credit ($18.3 million at December 31, 2008). As of December 31,2008, the Company had $193,000 of remaining availability under the revolvingcredit facility.

 

All borrowingsbear interest at a rate equal to either, at the option of the Company, (i) thehigher of the prime rate (3.25 percent at December 31, 2008) or thefederal funds rate (0.14 percent at December 31, 2008) (“Base Rate”) plusa margin of 1.50 percent to 2.00 percent in the case of the revolving creditfacility and 3.00 percent to 3.25 percent in the case of the term loan, basedon the Company’s funded debt to earnings before interest, taxes, depreciationand amortization (“EBITDA”) ratio, as defined in the agreement; or (ii) LIBOR(0.44 percent 30-day LIBOR at December 31, 2008) plus a margin of 2.50percent to 3.00 percent in the case of the revolving credit facility, and 4.00percent to 4.25 percent in the case of the term loan, based on the Company’sfunded debt to EBITDA ratio. The Company is charged a quarterly commitment feeon the unused portion of the revolving credit facility at an annual rate of0.50 percent. For the years ended December 31, 2008 and 2007, theeffective interest rate on the Credit Facility was approximately 7.92 percentand approximately 8.17 percent, respectively. The Credit Facility also providesthat the Company obtain interest rate protection for a period of three years ina notional amount not to be less than 50 percent of the aggregate principalamount of the term loan facility.

 

F-26

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**11.  Long-TermDebt (continued):**

 

*SeniorCredit Facility (continued):*

 

Borrowings underthe Credit Facility are collateralized by substantially all of the Company’sassets. The Credit Facility contains certain financial and other covenants suchas maintaining a maximum leverage ratio and a minimum interest coverage ratio,and includes restrictions on, among other things, acquisitions, the incurrenceof additional debt, investments, disposition of assets, liens and dividends andother distributions. If an event of default, such as failure to comply withcovenants or change of control, were to occur under the Credit Facility, thelenders would be entitled to declare all amounts outstanding under itimmediately due and payable and foreclose on the pledged assets.

 

As a result of theexpected impact of the deteriorating economic conditions on the Company’s 2009financial results, as well as financial covenant ratio adjustments requiredunder the Credit Facility in 2009, the Company became uncertain of its abilityto remain in compliance with the financial covenants through 2009. Therefore,on March 25, 2009, the Company amended the Credit Facility to, among otherthings: (i) adjust the financial covenants, including increasing maximumleverage ratios, decreasing minimum interest coverage ratios, and increasingmaximum capital expenditure limitations; (ii) increase the marginapplicable to Base Rate borrowings and LIBOR borrowings by 0.75 percent; (iii) createa minimum LIBOR of 2.50 percent; (iv) create a minimum Base Rate of LIBORplus 1.00 percent; (v) increase the letter-of-credit subfacility to $30.0million; (vi) permit the Company under certain circumstances to increasethe size of its revolving credit facility by up to $50.0 million in theaggregate; and (vii) limit the Company’s ability to invest in purchasedaccounts receivable under certain circumstances. Following the amendment, andafter giving effect to the repayment of certain amounts owed under the CreditAgreement with the proceeds of an equity sale (note 14), as of March 25,2009 the balance outstanding on the term loan was $573.6 million and thebalance outstanding on the revolving credit facility was $47.5 million. TheCompany had $35.0 million of remaining availability under the revolving creditfacility as of March 25, 2009.

 

*SeniorNotes and Senior Subordinated Notes:*

 

In connection withthe Transaction, on November 15, 2006 the Company issued $165.0 million offloating rate senior notes due 2013 (“Senior Notes”) and $200.0 million of11.875 percent senior subordinated notes due 2014 (“Senior Subordinated Notes”)(collectively, “the Notes”). The Notes are guaranteed, jointly and severally,on a senior basis with respect to the Senior Notes and on a senior subordinatedbasis with respect to the Senior Subordinated Notes, in each case by all of theCompany’s existing and future domestic restricted subsidiaries (other thancertain subsidiaries and joint ventures engaged in financing the purchase ofdelinquent accounts receivable portfolios and certain immaterial subsidiaries).

 

The Senior Notesare senior unsecured obligations and are senior in right of payment to allexisting and future senior subordinated indebtedness, including the SeniorSubordinated Notes, and all future subordinated indebtedness. The Senior Notesbear interest at an annual rate equal to LIBOR plus 4.875 percent, resetquarterly. For the years ended December 31, 2008 and 2007, the effectiveinterest rate on the Senior Notes was approximately 7.89 percent andapproximately 10.31 percent, respectively. The Company may redeem the SeniorNotes, in whole or in part, at any time at varying redemption prices dependingon the redemption date, plus accrued and unpaid interest.

 

F-27

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**11.  Long-Term Debt(continued):**

 

*SeniorNotes and Senior Subordinated Notes (continued):*

 

The SeniorSubordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future seniorindebtedness, including the Senior Notes and borrowings under the CreditFacility. The Company may redeem the Senior Subordinated Notes, in whole or inpart, at any time on or after November 15, 2010 at varying redemptionprices depending on the redemption date, plus accrued and unpaid interest. TheCompany also may redeem some or all of the Senior Subordinated Notes at anytime prior to November 15, 2010, at a redemption price equal to 100percent of the principal amount of the respective Notes to be redeemed, plusaccrued and unpaid interest and an additional premium. Finally, subject tocertain conditions, the Company may redeem up to 35 percent of the aggregateprincipal amount of the Senior Subordinated Notes at any time prior to November 15,2009 with the net proceeds of a sale of its capital stock at a redemption priceequal to 100 percent of the principal amount of the respective Notes to beredeemed, plus accrued and unpaid interest and an additional premium.

 

The indenturesgoverning the Notes contain a number of covenants that limit the Company’s andits restricted subsidiaries’ ability, among other things, to: incur additionalindebtedness and issue certain preferred stock, pay certain dividends, acquireshares of capital stock, make payments on subordinated debt or makeinvestments, place limitations on distributions from restricted subsidiaries,issue or sell capital stock of restricted subsidiaries, guarantee indebtedness,sell or exchange assets, enter into transactions with affiliates, createcertain liens, engage in unrelated businesses, and consolidate, merge ortransfer all or substantially all of the Company’s assets and the assets of itssubsidiaries on a consolidated basis. As of December 31, 2008, the Company wasin compliance with all required covenants. In addition, upon a change ofcontrol, the Company is required to offer to repurchase all of the Notes thenoutstanding, at a purchase price equal to 101 percent of their principalamount, plus any accrued interest to the date of repurchase.

 

*Nonrecourse Credit Facility:*

 

The Company has anonrecourse credit facility and an exclusivity agreement (collectively the “NonrecourseAgreement”) that provides that all purchases of accounts receivable by theCompany with a purchase price in excess of $1.0 million are first offered tothe lender for financing at its discretion. If the lender chooses toparticipate in the financing of a portfolio of accounts receivable, the financingmay be structured, depending on the size and nature of the portfolio to bepurchased, either as a borrowing arrangement or under various equity sharingarrangements. The lender will finance non-equity borrowings with floatinginterest at an annual rate equal to LIBOR (0.44 percent 30-day LIBOR at December 31,2008) plus 2.50 percent, or as negotiated. These borrowings are nonrecourse tothe Company and are due two years from the date of each respective loan, unlessotherwise negotiated. As additional return on the debt financed portfolios thelender receives residual cash flows, as negotiated, which is defined as allcash collections after servicing fees, floating rate interest, repayment of theborrowing, and the initial investment by the Company, including interest.Residual cash flow payments are accrued for as embedded derivatives under FAS133. The Company may terminate the exclusivity agreement for a cost of $250,000for each month remaining under the term of the agreement.

 

Borrowings underthe Nonrecourse Agreement are nonrecourse to the Company, except for the assetswithin the entities established in connection with the financing agreement. TheNonrecourse Agreement contains a collections performance requirement, amongother covenants, that, if not met, provides for cross-collateralization withany other portfolios financed through the Nonrecourse Agreement, in addition toother remedies.

 

Total debtoutstanding under this facility was $37.2 million and $53.7 million as of December 31,2008 and 2007, respectively, which included $3.7 million and $9.6 million,respectively, of accrued residual interest. The effective interest rate onthese loans, including the residual interest component, was approximately 10.0percent and 17.7 percent for the years ended December 31, 2008 and 2007,respectively. The nonrecourse credit facility contains certain covenants suchas meeting minimum cumulative collection targets. As of December 31, 2008,the Company was in compliance with all required covenants.

 

F-28

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Table of Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**11.  Long-Term Debt(continued):**

 

*NonrecourseCredit Facility (continued):*

 

The exclusivityagreement to the Nonrecourse Agreement expires on June 30, 2009. TheCompany has begun to discuss future lending facilities for the purchases ofaccounts receivable with its existing lender and other third-party lenders.Such future borrowings, if any, may reduce the Company’s use of available cashor borrowings under its revolving credit facility.

 

*Capital leases:*

 

The Company leases tworeal estate facilities under capital leases. These leases have ten year terms,expiring in 2018.

 

**12.  Operating Leases:**

 

The Company leases certain equipment and real estatefacilities under noncancelable operating leases. These leases expire between2009 and 2022, and most contain renewal options. The following represents thefuture minimum payments, by year and in the aggregate, under noncancelableoperating leases with initial or remaining terms of one year or more. Thefollowing future minimum payments have been reduced by minimum sublease rentalsof $2.2 million, due in the future under noncancelable subleases, and do notinclude the leases from the Company’s former Fort Washington locations (note19) (amounts in thousands).

 

| 2009       |   | $      | 59,109  |   |
|------------|--------|--------|---------|--------|
| 2010       |   | 49,648 |    |
| 2011       |   | 38,998 |    |
| 2012       |   | 30,996 |    |
| 2013       |   | 24,003 |    |
| Thereafter |   | 43,027 |    |
|       |   | $      | 245,781 |   |

 

For the years ended December 31,2008 and 2007, rent expense was $51.0 million and $39.3 million, respectively.Rent expense was $34.0 million and $5.2 million for the periods from January 1,2006 through November 15, 2006 and July 13, 2006 through December 31,2006, respectively. The total amount of base rent payments is being charged toexpense on the straight-line method over the term of the lease.

 

**13.  IncomeTaxes:**

 

Income tax (benefit)expense consisted of the following components (amounts in thousands):

 
| ** **                    | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                    | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **                    | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                    | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                    | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
| Currently  payable:           |       |                                  |       |                  |       |   |   |   |   |
| Federal                       |       | $                                     | —     |                  | $          | (415 | ) | $ | 446 |   | $ | (228 | ) |
| State                         |       | 1,921                                 |       | 995                   |       | 22 |   | 55 |   |
| Foreign                       |       | 2,976                                 |       | 1,678                 |       | 65 |   | 1,385 |   |
|                          |       |                                  |       |                  |       |   |   |   |   |
| Deferred:                     |       |                                  |       |                  |       |   |   |   |   |
| Federal                       |       | (73,596                               | )          | (20,406               | )          | (3,761 | ) | 11,553 |   |
| State                         |       | (3,333                                | )          | 1,723                 |       | (290 | ) | 858 |   |
| Foreign                       |       | 85                                    |       | 321                   |       | (4 | ) | 1,119 |   |
| Income tax  (benefit) expense |       | $                                     | (71,947    | )                     | $          | (16,104 | ) | $ | (3,522 | ) | $ | 14,742 |   |

 

F-29

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**13.  IncomeTaxes (continued):**

 

Deferred taxassets (liabilities) consisted of the following (amounts in thousands):

 
| ** **                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| Deferred tax  assets:            |       |                  |       |                  |       |
| Net operating  loss carryfowards |       | $                     | 102,891    |                  | $          | 70,285 |   |
| Deferred  contractual revenue    |       | 14,029                |       | 750                   |       |
| Accrued  acquisition costs       |       | 3,501                 |       | 965                   |       |
| Tax credits                      |       | 11,574                |       | 2,451                 |       |
| Accrued expenses                 |       | 21,772                |       | 14,168                |       |
| Total deferred  tax assets       |       | 153,767               |       | 88,619                |       |
| Valuation  allowance             |       | 31,351                |       | 24,037                |       |
| Net deferred tax  assets         |       | 122,416               |       | 64,582                |       |
|                             |       |                  |       |                  |       |
| Deferred  liabilities:           |       |                  |       |                  |       |
| Intangible  assets               |       | 129,295               |       | 122,562               |       |
| Prepaid expenses                 |       | 3,411                 |       | 1,088                 |       |
| Purchased  accounts receivable   |       | 14,017                |       | 38,959                |       |
| Property, plant  and equipment   |       | 8,842                 |       | 12,097                |       |
| Total deferred  tax liabilities  |       | 155,565               |       | 174,706               |       |
| Net deferred tax  liabilities    |       | $                     | (33,149    | )                     | $          | (110,124 | ) |

 

The Company had a $72.0million deferred tax asset for federal net operating loss carryforwards of $205.6million at December 31, 2008, which are expiring through 2028. The Companyhad a $43.4 million deferred tax asset for federal net operating losscarryforwards of $124.0 million at December 31, 2007.

 

At December 31, 2008,approximately $108.1 million of the Company’s federal net operating losscarryforwards are subject to limitations as defined by Section 382 of theInternal Revenue Code. Section 382 imposes limitations on a corporation’sability to utilize its net operating loss carryforwards if it experiences an“ownership change.” In general terms, an ownership change results from transactionsincreasing the ownership of certain stockholders in the stock of a corporationby more than 50 percent over a three-year period.

 

The Company had a $1.3million deferred tax asset for foreign net operating loss carryforwards of $4.9million at December 31, 2008, which will not expire for ten or more years.The Company had $7.0 million of foreign net operating loss carryforwards at December 31,2007.

 

The Company had deferredtax assets for state net operating loss carryforwards of $29.6 million and$24.6 million at December 31, 2008 and December 31, 2007,respectively.

 

In assessing therealization of deferred tax assets, the Company considers whether it is more likelythan not that some portion of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible or the net operating losses can be utilized. A valuationallowance of $31.4 million has been provided for a portion of deferred taxassets primarily relating to certain foreign and state net operating losses andstate tax credits that, based on the Company’s assessment, its is more likelythan not that such amounts will not be realized. This represents an increase of$7.3 million due to additional state and foreign net operating losses in 2008and a valuation allowance related to the OSI acquisition, which was recorded asan adjustment to goodwill.

 

The deferred taxliability related to intangible assets arose primarily from theTransaction on November 15, 2006, as well as other subsequentacquisitions.

 

The portfolios ofpurchased accounts receivable are composed of distressed debt. Collectionresults are not guaranteed until received; accordingly, for tax purposes, anygain on a particular portfolio is deferred until the full cost of itsacquisition is recovered. Revenue for financial reporting purposes isrecognized ratably over the life of the portfolio. Deferred tax liabilitiesarise from deferrals created during the early stages of the portfolio. Thesedeferrals reverse after the cost basis of the portfolio is recovered.

 

F-30

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**13.  IncomeTaxes (continued):**

 

A reconciliationof the U.S. statutory income tax rate to the effective rate was as follows:

 
| ** **                                      | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | ** **                            | ** ** | **Period from**  | ** ** | **Period from** | ** ** |
| ** **                                      | ** ** | ** **                            | ** ** | **July 13**      | ** ** | **January 1** | ** ** |
| ** **                                      | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                                      | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                      | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
| U.S. statutory  income tax rate                 |       | 35.0                                  | %          | 35.0                  | %          | 35.0 | % | 35.0 | % |
| State taxes, net  of federal                    |       | 0.5                                   |       | (0.2                  | )          | 0.2 |   | 1.6 |   |
| Goodwill  impairment                            |       | (17.4                                 | )          | —                |       | (30.8 | ) | — |   |
| Impact of change  in state laws, net of federal |       | —                                |       | (3.5                  | )          | — |   | — |   |
| Permanent items                                 |       | (0.1                                  | )          | 0.2                   |       | — |   | 0.5 |   |
| Minority interest                               |       | (2.1                                  | )          | 3.7                   |       | — |   | — |   |
| Foreign                                         |       | (0.2                                  | )          | 0.4                   |       | — |   | (0.4 | ) |
| Other, net                                      |       | 1.1                                   |       | 0.1                   |       | — |   | 0.5 |   |
| Effective tax  rate                             |       | 16.8                                  | %          | 35.7                  | %          | 4.4 | % | 37.2 | % |

 

Pre-tax incomefrom operations included foreign subsidiary income of $7.1 million and $9.3million for the years ended December 31, 2008 and 2007, respectively.Pre-tax income from operations included foreign subsidiary income of $7.6million and $254,000 for the periods from January 1, 2006 through November 15,2006 and July 13, 2006 through December 31, 2006, respectively. TheCompany’s cumulative undistributed earnings of foreign subsidiaries of $38.4million for the year ended December 31, 2008 are expected to be reinvestedindefinitely, and accordingly no incremental U.S. or foreign withholding taxeshave been recorded.

 

In July 2006,the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes, and RelatedImplementation Issues,” which provides guidance on the financial statementrecognition, measurement, presentation and disclosure of uncertain tax positionsthat a company has taken or expects to take on a tax return. Under FIN 48,financial statements should reflect expected future tax consequences of suchpositions presuming the taxing authorities have full knowledge of the positionand all relevant facts.  FIN 48 requiresapplication of a more likely than not threshold to the recognition of uncertaintax positions.  FIN 48 permits theCompany to recognize the amount of tax benefit that has a greater than 50percent likelihood of being ultimately realized upon settlement. It furtherrequires that a change in judgment related to the expected ultimate resolutionof uncertain tax positions be recognized in earnings in the quarter of suchchange. The difference between a tax position taken or expected to be taken ina tax return and the benefit recognized and measured pursuant to FIN 48represents an unrecognized tax benefit. An unrecognized tax benefit is aliability that represents a potential future obligation to the taxingauthorities. This interpretation also revises the disclosure requirements andwas effective for the Company as of January 1, 2007.

 

On January 1,2007, the Company adopted FIN 48, which did not have a material impact on theCompany’s financial position or results of operations. As of December 31,2008 and 2007, the Company had $8.3 million and $9.1 million in reserves foruncertain tax positions, including penalties that, if recognized, would affectthe effective tax rate.

 

The Companyrecognizes interest related to uncertain tax positions in “Interest expense.”As of December 31, 2008 and 2007, the Company had $4.0 million and $4.1million, respectively, of accrued interest related to uncertain tax positions.The Company recognizes penalties related to uncertain tax positions in theprovision for income taxes.

 

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**13.  IncomeTaxes (continued):**

 

The following is aroll forward of our gross unrecognized tax benefits under FIN 48 (amounts inthousands):

 

| Balance at  January 1, 2007   |   | $      | 9,752  |   |
|------------------------------------|--------|--------|--------|--------|
| Prior year  positions:             |   |   |   |
| Additions                          |   | 1,572  |   |
| Reductions                         |   | — |   |
| Current year  positions:           |   |   |   |
| Additions                          |   | 28     |   |
| Reductions                         |   | — |   |
| Settlements with  tax authorities  |   | (105   | )      |
| Reductions due  to statute lapse   |   | (1,630 | )      |
|                               |   |   |   |
| Balance at  January 1, 2008   |   | 9,617  |   |
| Prior year  positions:             |   |   |   |
| Additions                          |   | 1,407  |   |
| Reductions                         |   | — |   |
| Change in  exchange rates          |   | (1,349 | )      |
| Reductions due  to statute lapse   |   | (852   | )      |
|                               |   |   |   |
| Balance at  December 31, 2008 |   | $      | 8,823  |   |

 

The Company issubject to federal, state and foreign income tax audits from time to time thatcould result in proposed assessments. The Company cannot predict with certaintyhow these audits will be resolved and whether the Company will be required tomake additional tax payments, which may or may not include penalties andinterest. As of December 31, 2008, the Company is no longer subject to federalincome tax examinations for tax years prior to 2006. For most states andforeign countries where the Company conducts business, the Company is subjectto examination for the preceding three to six years.  In certain states and foreign countries, theperiod could be longer.

 

Managementbelieves that the Company has provided sufficient tax provisions for taxperiods within the statutory period of limitations not previously audited andthat are potentially open for examination by the taxing authorities. Potentialliabilities associated with these years will be resolved when an event occursto warrant closure, primarily through the completion of audits by taxingjurisdictions. To the extent audits or other events result in a materialadjustment to the accrued estimates, the effect would be recognized during theperiod of the event. There can be no assurance, however, that the ultimateoutcome of audits will not have a material adverse impact on the Company’sfinancial position, results of operations or cash flows.

 

F-32

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**14.  Stockholders’ Equity:**

 

The following summarizesthe Company’s share activity (shares in thousands):

 
| ** **                                            | ** ** | **Successor** | ** ** | **Predecessor**  | ** ** |
|-------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Class L** | ** ** | **Class A** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Preferred** | ** ** | **Common**       | ** ** | **Common** | ** ** | **Common** | ** ** |
| *Predecessor:*                                        |       |          |       |             |       |   |   |   |   |
| Balance,  January 1, 2006                        |       |          |       |             |       |   |   | 32,176 |   |
| Stock-based  compensation plans                       |       |          |       |             |       |   |   | 240 |   |
| Balance,  November 15, 2006                      |       |          |       |             |       |   |   | 32,416 |   |
|                                                  |       |          |       |             |       |   |   |   |   |
| *Successor:*                                          |       |          |       |             |       |   |   |   |   |
| Capitalization  of Company                            |       | 1,220         |       | 364              |       | 1,616 |   |   |   |
| Balance,  December 31, 2006                      |       | 1,220         |       | 364              |       | 1,616 |   |   |   |
| Issuance of  preferred stock dividends                |       | 188           |       | —           |       | — |   |   |   |
| Issuance of  Class A common, net of cancelations |       | —        |       | —           |       | 135 |   |   |   |
| Issuance of  restricted stock                         |       | —        |       | —           |       | 71 |   |   |   |
| Balance,  December 31, 2007                      |       | 1,408         |       | 364              |       | 1,822 |   |   |   |
| Issuance of  preferred stock                          |       | 867           |       | —           |       | — |   |   |   |
| Issuance of  preferred stock dividends                |       | 298           |       | —           |       | — |   |   |   |
| Issuance of  Class L common, net of cancelations |       | —        |       | 37               |       | — |   |   |   |
| Issuance of  Class A common, net of cancelations |       | —        |       | —           |       | 1,012 |   |   |   |
| Issuance of  restricted stock, net of cancelations    |       | —        |       | —           |       | 103 |   |   |   |
| Balance,  December 31, 2008                      |       | 2,573         |       | 401              |       | 2,937 |   |   |   |

 

*Capital Stock:*

 

The Company is authorizedto issue three classes of capital stock: Preferred Stock, par value $0.01 pershare, Class L Common Stock, par value $0.01 per share (“Class L”)and Class A common stock, par value $0.01 per share (“Class A”).Shares of Class L, Class A and three series of Preferred Stock; Series A14 percent PIK Preferred Stock (“Series A”), Series B-1 19 percentPIK Preferred Stock (“Series B-1”), and Series B-2 19 percentPreferred Stock (“Series B-2”), are issued and outstanding.

 

On December 8, 2008,the Company increased its authorized capital to the following amounts:7,500,000 shares of Preferred Stock; 800,000 shares of Class L; and4,500,000 shares of Class A. On December 9, 2008, the Companyprivately placed 40,746 shares of Series B-1 and 1,369 shares of Series B-2,for aggregate proceeds of $10.0 million.

 

Series A is entitledto a “paid-in-kind” dividend at an annual rate of 14 percent, Series B-1is entitled to a  “paid-in-kind” dividendat an annual rate of 19 percent, Series B-2 is entitled to a yield at anannual rate of 19 percent and Class L is entitled to a yield at an annualrate of 14 percent. The dividends and yields are calculated on February 28,May 31, August 31 and November 30 of each year. For the yearended December 31, 2008 and 2007, 298,297 and 188,290 shares of Series Awere issued for the Series A “paid-in-kind” dividends, respectively. Theyields for Series B-2 and Class L are compounding and accumulate onthe unreturned initial investment but are not declared until payment. As of December 31,2008, the accumulated yield for shares of Series B-2 and Class L waszero and $29.0 million, respectively.

 

F-33

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Tableof Contents

 

**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**14.  Stockholders’ Equity (continued):**

 

*Capital Stock (continued):*

 

On January 2, 2008,the Company issued 22,484 shares of Series A to JPM as partialconsideration for the acquisition of SST. Due to the related party nature ofthe acquisition (note 4), the remaining consideration of $8.1 million was adeemed cash dividend payment.

 

In connection with theOSI acquisition, the Company privately placed 802,262 shares of Series A,37,738 shares of Class L and 1,012,261 shares of Class A foraggregate proceeds of $210.0 million. The entire amount of the proceeds wasused to acquire OSI.

 

On March 25,2009, in connection with the amendment of the Company’s Credit Facility (note11), the Company sold 147,447.3 shares of its Series B-1 Preferred Stockand 20,973.7 shares of its Series B-2 Preferred Stock to One EquityPartners, Michael J. Barrist and certain members of executive management, andother co-investors for an aggregate purchase price of $40.0 million. Theproceeds were used to pay down $15.0 million of term loan borrowings, and theremainder, net of expenses, of $22.5 million was used to repay borrowings underthe revolving credit facility.

 

Preferred Stock and Class L,in the aggregate, have a preference on distributions (excluding paid-in-kinddividends) allocated as follows: first to unpaid yield accruing on Class Lor Series A and the unreturned value of Series A issued in a paid-in-kinddividend, and second to the unreturned initial investment in Class L,excluding the portion of such investment that is attributable to the right of Class Lto share generally in distributions, and the unreturned initial investments in Series A.Once this preference has been paid in full, all remaining distributions arepayable to Class L and Class A on a pro-rata basis.

 

Preferred Stock is notentitled to vote, and Class L and Class A vote together as a singleclass, with each share entitled to one vote. In addition, the Company may notenter into an agreement or consummate a transaction that would result in achange of control or an initial public offering without the consent of theholders of a majority of the then outstanding shares of Series A and Class Lvoting as a single class.

 

*Stock-based Compensation:*

 

Successor:

 

On November 15,2006, the Company adopted the Collect Holdings, Inc. Restricted Share Planand authorized grants of restricted shares of the Company to management. On March 28,2008, the Board of Directors approved the amendment and restatement of theRestricted Share Plan to: (i) permit members of our Board of Directors toparticipate and (ii) to increase the number of shares authorized forissuance under that Plan to 336,666.7 shares (the “Restricted Share Plan”). TheRestricted Share Plan is administered by the Compensation Committee of theBoard of Directors, which approves the grants to employees recommended by theCompany’s chief executive officer. Shares of restricted stock granted under theRestricted Share Plan vest in 25 percent increments over a period of fouryears, provided that the recipient remains employed by the Company. At December 31,2008, an aggregate of 308,779 restricted shares of Class A common stockhad been awarded and 27,888 shares of Class A common stock were availablefor future awards under the Restricted Share Plan. Compensation expenserecognized related to the awards for the years ended December 31, 2008 and2007 was $667,000 and $394,000, respectively. Compensation expense for theperiod from July 13, 2006 through December 31, 2006 was $49,000. At December 31,2008, there was $2.0 million of unrecognized pre-tax compensation cost relatedto the non-vested restricted shares. The Company measures compensation expensebased on the grant date fair value, and has elected to recognize thiscompensation expense on a straight-line basis over the weighted-average serviceperiod, which is expected to be four years.

 

Predecessor:

 

On November 15, 2006, in connection with theTransaction and in accordance with the terms of the equity awards, the vestingof all outstanding unvested options to purchase the Company’s stock andrestricted stock units was accelerated, and the Company recorded compensationexpense of approximately $5.1 million for the acceleration.

 

F-34

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**14.  Stockholders’ Equity (continued):**

 

*Stock-based Compensation (continued):*

 

Predecessor (continued):

 

The Company maintainedstock option plans and an equity incentive plan for certain employees underwhich fixed price stock options were granted and the option price was generallynot less than the fair value of a share of the underlying stock at the date ofgrant (collectively, the “NCO Option Plans”). Option terms were generally 10years, with options generally becoming exercisable ratably over three years, orone year for outside directors, from the date of grant.

 

The fair value of each stock option was estimated onthe date of grant using the Black-Scholes option-pricing model that used theassumptions noted in the following table. Expected volatility was based on ablend of implied and historical volatility of the Company’s predecessor commonstock. The Company used historical data on exercises of stock options and otherfactors to estimate the expected term of the share-based payments granted. Therisk free rate was based on the U.S. Treasury yield curve in effect at the dateof grant. The fair value of each predecessor common stock option granted wasestimated using the following weighted-average assumptions:

 
| ** **               | ** ** | **Period from  January 1  through  November 15,  2006** | ** ** |
|--------------------------|------------|------------------------------------------------------------------------|------------|
| Risk-free  interest rate |       | 4.5                                                                    | %          |
| Expected life in  years  |       | 5.4                                                                    |       |
| Volatility  factor       |       | 37.4                                                                   | %          |
| Dividend yield           |       | None                                                                   |       |

 

The following summarizesthe activity of the NCO Option Plans (amounts in thousands, except per shareamounts):

 
| ** **                             | ** ** | ** **         | ** ** | **Weighted**            | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Average**             | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** |
| ** **                             | ** ** | **Options**        | ** ** | **Per Share**      | ** ** |
| Outstanding at  January 1, 2006   |       | 4,387              |       | 23.65                   |       |
| Granted                                |       | 294                |       | 17.27                   |       |
| Exercised                              |       | (3,617             | )          | 20.87                   |       |
| Forfeited                              |       | (904               | )          | 30.25                   |       |
| Expired                                |       | (37                | )          | 19.87                   |       |
| Outstanding at  November 15, 2006 |       | 123                |       | 43.68                   |       |
| Forfeited                              |       | (116               | )          | 44.44                   |       |
| Outstanding at  December 31, 2006 |       | 7                  |       | $                       | 30.05      |   |
|                                        |            |                    |            |                         |            |  |

 

As a result of theTransaction, effective as of November 16, 2006 all remaining outstandingstock options are only exercisable for $27.50 per share in cash (theTransaction purchase price per share). All of the stock options outstanding asof December 31, 2006, had an exercise price in excess of $27.50. Becausethese stock options were granted under the NCO Group, Inc. 1996 StockOption Plan, the Company does not have the authority under that plan to cancelthe remaining options. These options will expire according to their originalterms unless previously exercised for $27.50 per share in cash.

 

F-35

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**14.  Stockholders’Equity (continued):**

 

*Stock-basedCompensation (continued):*

 

Predecessor (continued):

 

The weighted-average fairvalue at date of grant of a common stock option during the period from January 1,2006 through November 15, 2006 was $7.20. The total intrinsic value(market value on date of exercise less exercise price) of options exercised duringthe period from January 1, 2006 through November 15, 2006 was $23.3million. For the period from January 1, 2006 through November 15,2006, the Company had $20.0 million of excess cash tax benefit that was notrecorded as a financing cash inflow due to the existence of net operating losscarryforwards.

 

Cash received from optionexercises under all share-based payment arrangements for the period from January 1,2006 through November 15, 2006 was $3.9 million. The actual tax benefitrecognized for the tax deductions from predecessor option exercises under allshare-based payment arrangements for the period from January 1, 2006through November 15, 2006 was $496,000.

 

The Company recognizesthe cost of stock option grants to employees over the vesting period based ontheir fair values. Compensation expense recognized related to stock optionawards for the period from January 1, 2006 through November 15, 2006was $2.1 million, including $1.5 million for the acceleration of vesting inconnection with the Transaction.

 

The Company maintained anequity incentive plan under which certain employees and directors (“Participant”)were granted restricted share unit awards in the Company’s common stock (the “RestrictedStock Plan”). Awards of restricted share units were valued by reference toshares of common stock that entitled a Participant to receive, upon thesettlement of the unit, one share of common stock for each unit. The awardsvested over multiple cliff vesting periods and/or based on meeting performance-basedtargets, and did not have voting rights. The following summarizes the activityof the Restricted Stock Plan for the period from January 1, 2006 through November 15,2006 (amounts in thousands, except per share amounts):

** **
| ** **                                 | ** ** | **Number of**  | ** ** | **Weighted**        | ** ** |
|--------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Non-vested**      | ** ** | **Average**         | ** ** |
| ** **                                 | ** ** | **Share Unit** | ** ** | **Grant Date** | ** ** |
| ** **                                 | ** ** | **Awards**          | ** ** | **Fair Value** | ** ** |
| Unvested awards  at January 1, 2006   |       | 278                 |       | $                   | 21.34      |   |
| Granted                                    |       | 17                  |       | 25.69               |       |
| Awards vested                              |       | (295                | )          | 21.59               |       |
| Unvested awards  at November 15, 2006 |       | —              |       | $                   | —     |   |

 

Compensationexpense recognized related to restricted share unit awards for the period from January 1,2006 through November 15, 2006 was $5.0 million, including $3.6 millionfor the acceleration of vesting in connection with the Transaction

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**15.  DerivativeFinancial Instruments:**

 

The Company entersinto forward exchange contracts to minimize the impact of currency fluctuationson transactions and cash flows. These contracts may be designated as cash flowhedges. The Company had forward exchange contracts for the purchase of 995.0million Philippine pesos and 125.0 million Canadian dollars outstanding at December 31,2008, which mature throughout 2009. The impact of the settlement of the Company’sforeign exchange cash flow hedges was recorded in payroll and related expenses,selling, general and administrative expenses and other income (expense) in thestatement of operations. Effective October 1, 2008, none of the forwardexchange contracts were accounted for as cash flow hedges and, accordingly,$2.4 million of unrealized losses, previously included in “Other comprehensive income(loss)” were reclassified into earnings during the fourth quarter as the forecastedtransactions settled, and were recorded in “other income (expense)” in thestatement of operations. For the year ended December 31, 2008, the Companyrecorded losses of $12.8 million in “other income (expense)” for the changes inthe fair market value of the forward exchange contracts. At December 31,2008, the fair market value of all outstanding forward exchange contracts was anet liability of $10.5 million, $11.4 million of which was included in accruedexpenses and $923,000 of which was included in other current assets. At December 31,2007, the fair market value of all outstanding forward exchange contracts was anet asset of $51,000, $423,000 of which was included in other current assetsand $372,000 of which was included in accrued expenses.

 

The Company hasinterest rate swap agreements to minimize the impact of LIBOR fluctuations oninterest payments on the Company’s floating rate debt. The interest rate swapsare designated as cash flow hedges. The interest rate swaps cover an aggregatenotional amount of $356.5 million. The Company is required to pay thecounterparties quarterly interest payments at a weighted average fixed rateranging from 3.41 percent to 4.89 percent, and receives from the counterpartiesvariable quarterly interest payments based on LIBOR. The net interest paid orreceived is included in interest expense. As of December 31, 2008 and 2007,the fair market value of the interest rate swaps was a liability of $13.2million and $3.3 million, respectively, which was included in accrued expenses.

 

The followingpresents the Company’s unrealized and realized gains (losses) relating to cashflow hedges (amounts in thousands):

 
| ** **                                              | ** ** | **For the years ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | **December 31,**                  | ** ** |
| ** **                                              | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Unrealized net  gains (losses)                          |       | $                                      | (21,698    | ) | $ | 3,634 |   |
| Realized net  gains (losses) reclassified into earnings |       | 11,847                                 |       | (4,731 | ) |
| Total                                                   |       | $                                      | (9,851     | ) | $ | (1,097 | ) |

 

The Company’s nonrecourse credit facility relating topurchased accounts receivable contains contingent payments that are accountedfor as embedded derivatives. At December 31, 2008 and 2007, the estimatedfair value of the embedded derivative was $3.7 million and $9.6 million,respectively. Changes in the fair market value of the embedded derivatives arerecorded in interest expense on the statement of operations. During the yearsended December 31, 2008 and 2007, interest expense was reduced by $4.5million and increased by $71,000, respectively, to reflect decreases andincreases, respectively, in the fair value of the embedded derivatives.

 

The Company enters into interest rate cap contracts tominimize the impact of LIBOR fluctuations on transactions and cash flows. TheCompany had interest rate caps covering an aggregate notional amount of $517.7million at December 31, 2008, with a weighted average LIBOR cap rate of4.00 to 6.00 percent, depending on the agreement. The interest rate caps arenot designated as cash flow hedges, and, accordingly, changes in fair marketvalue, if any, are recorded in other income (expense) in the statement ofoperations. As of December 31, 2008, the fair market value of alloutstanding interest rate caps was $1,000, which was included in other currentassets.

 

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**NCO GROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**16.  FairValue of Financial Instruments:**

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstrument for which it is practicable to estimate that value:

 

*Cashand Cash Equivalents, Trade Accounts Receivable, and Accounts Payable:*

 

The carrying amount reported in the balance sheetsapproximates fair value because of the short maturity of these instruments.

 

*PurchasedAccounts Receivable:*

######  

The Company recordspurchased accounts receivable at cost, which is discounted from the contractualreceivable balance. The carrying value of purchased accounts receivable, whichis estimated based upon future cash flows, approximates fair value at December 31,2008 and 2007.

 

*NotesReceivable:*

 

The Company had notesreceivable of $8.4 million and $8.6 million as of December 31, 2008 and2007, respectively. The carrying amounts reported in the balance sheets,included in current and long-term other assets, approximated market rates fornotes with similar terms and maturities, and, accordingly, the carrying amountsapproximated fair value.

 

*Long-Term Debt:*

 

The following presents the carrying values and theestimated fair values of the Company’s long-term debt at December 31, 2008(amounts in thousands):

 

| ** **                        | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|-------------------------|------------|---------------------|------------|
| Senior term loan                  |       | $                       | 588,605    |                | $          | 526,123 |   |
| Senior revolving  credit facility |       | 81,500                  |       | 75,273              |       |
| Senior  subordinated notes        |       | 200,000                 |       | 100,000             |       |
| Senior notes                      |       | 165,000                 |       | 82,500              |       |
| Nonrecourse  credit facility      |       | 37,244                  |       | 37,244              |       |
|                                   |            |                         |            |                     |            |  |  |

 

The fair values of the Company’s senior term loan andsenior revolving credit facility are based on market interest rates for debtwith similar terms and maturities. The fair values of the Company’s SeniorNotes and Senior Subordinated Notes are based on their trading prices at December 31,2008.

 

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Tableof Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated FinancialStatements (continued)**

 

**17.  Supplemental Cash Flow Information:**

 

The following aresupplemental disclosures of cash flow information (amounts in thousands):

 
| ** **                                              | ** ** | **Successor**                         | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | ** **                            | ** ** | ** **            | ** ** | **Period from** | ** ** | **Period from** | ** ** |
| ** **                                              | ** ** | ** **                            | ** ** | ** **            | ** ** | **July 13** | ** ** | **January 1** | ** ** |
| ** **                                              | ** ** | **For the year ended** | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                                              | ** ** | **December 31,**                 | ** ** | **December 31,** | ** ** | **November 15,** | ** ** |
| ** **                                              | ** ** | **2008**                              | ** ** | **2007**              | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                                    |       |                                  |       |                  |       |   |   |   |   |
| Cash paid for  interest                                 |       | $                                     | 99,265     |                  | $          | 94,971 |   | $ | 6,978 |   | $ | 26,806 |   |
| Cash paid for  income taxes                             |       | 4,276                                 |       | 3,325                 |       | 5,816 |   | 2,209 |   |
| Noncash  investing and financing activities:            |       |                                  |       |                  |       |   |   |   |   |
| Fair value of  assets acquired                          |       | 139,489                               |       | 6,317                 |       | 1,657,361 |   | 4,911 |   |
| Liabilities  assumed from acquisitions                  |       | 127,928                               |       | 966                   |       | 399,630 |   | 1,615 |   |
| Capital leases                                          |       | 5,456                                 |       | —                |       | — |   | — |   |
| Estimated  earnout payment for acquisitions             |       | —                                |       | 14,775                |       | — |   | — |   |
| General and  admin. expenses paid by SST parent         |       | —                                |       | 4,781                 |       | 328 |   | — |   |
| SST parent  forgiveness of debt, net                    |       | —                                |       | 4,690                 |       | — |   | — |   |
| Nonrecourse  borrowings to purchase accounts receivable |       | —                                |       | —                |       | — |   | 1,025 |   |
| Adjustment to  acquired assets and liabilities          |       | (62                                   | )          | (3,508                | )          | — |   | 7,465 |   |
| Disposal of  fixed assets                               |       | 13                                    |       | 916                   |       | — |   | 1,336 |   |
|                                                         |            |                                       |            |                       |            |  |  |  |  |  |  |  |  |

 

**18.  Employee BenefitPlans:**

 

The Company has a savingsplan under Section 401(k) of the Internal Revenue Code, (the “Plan”),for its U.S. employees. The Plan allows all eligible employees to defer up to15 percent of their income on a pretax basis through contributions to the Plan,subject to limitations under Section 401(k) of the Internal RevenueCode. The Company will provide a matching contribution of 25 percent of thefirst six percent of an employee’s contribution. The Company also has similartype plans for its international employees. The charges to operations for thematching contributions were $3.3 million and $2.3 million for the years ended December 31,2008 and 2007, respectively. The charges to operations for the matchingcontributions were $1.1 million and $297,000 for the periods from January 1,2006 through November 15, 2006 and July 13, 2006 through December 31,2006, respectively.

 

The Company has a deferredcompensation plan, (the “Deferred Compensation Plan”), to permit eligibleemployees of the Company to defer receipt and taxation of their compensationfrom the Company each year up to the limit in effect under Section 402(g) ofthe Internal Revenue Code, less amounts contributed to the DeferredCompensation Plan. The Company, at its discretion, may make a contribution thatwill be allocated among participants in proportion to their deferrals for suchyear. All executive officers and other key employees designated by the Companyare eligible to participate in the Deferred Compensation Plan. At December 31,2008, the Company had a liability of $687,000 related to the DeferredCompensation Plan.

 

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

**19.  Commitments and Contingencies:**

 

*PurchaseCommitments:*

 

The Company enters into noncancelable agreements withvarious telecommunications companies, a foreign labor subcontractor in India,and other vendors that require minimum purchase commitments. These agreementsexpire between 2009 and 2011. The following represents the future minimumpayments, by year and in the aggregate, under noncancelable purchasecommitments (amounts in thousands):

 
| 2009   |   | $      | 33,867 |   |
|--------|--------|--------|--------|--------|
| 2010   |   | 30,026 |   |
| 2011   |   | 15,156 |   |
|   |   |   |   |
|   |   | $      | 79,049 |   |

 

The Company incurred$52.6 million and $60.6 million of expense in connection with these purchasecommitments for the years ended December 31, 2008 and 2007, respectively.The Company incurred $52.1 million and $6.7 million of expense in connectionwith these purchase commitments for the periods from January 1, 2006through November 15, 2006 and July 13, 2006 through December 31,2006, respectively.

 

*Forward-FlowAgreements:*

 

The Company has severalfixed price agreements, or forward-flows, that obligate the Company topurchase, on a monthly basis, portfolios of charged-off accounts receivablemeeting certain criteria. The forward flow agreements expire between February 2009and August 2012, and the terms of the agreements vary; some may beterminated by the seller with either 30, 60 or 90 day written notice. Thefollowing represents the estimated future forward-flow commitments by year(amounts in thousands):

 
| 2009   |   | $      | 28,966 |   |
|--------|--------|--------|--------|--------|
| 2010   |   | 12,499 |   |
| 2011   |   | 2,880  |   |
| 2012   |   | 900    |   |
|   |   |   |   |
|   |   | $      | 45,245 |   |

 

*Litigationand Investigations:*

 

The Company is party, from time to time, to variouslegal proceedings, regulatory investigations and tax examinations incidental toits business. The Company continually monitors these legal proceedings,regulatory investigations and tax examinations to determine the impact and anyrequired accruals.

 

Fort Washington Flood:

 

In June 2001, the first floor of the Company’s Fort Washington,Pennsylvania, headquarters was severely damaged by a flood caused by remnantsof Tropical Storm Allison. The Company subsequently decided to relocate itscorporate headquarters to Horsham, Pennsylvania. The Company filed a lawsuit onAugust 14, 2001 in the Court of Common Pleas, Montgomery County,Pennsylvania (Civil Action No. 01-15576) against the current landlord andthe former landlord of the Fort Washington facilities to terminate the leasesand to obtain other relief. The landlord and the former landlord filedcounter-claims against the Company. The Company maintains a reserve that itbelieves is adequate to address its exposure to this matter and plans tocontinue to contest this matter.

 

F-40

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Table of Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

**19.  Commitmentsand Contingencies (continued):**

 

*Litigationand Investigations (continued):*

 

U.S. Department of Justice:

 

On February 24, 2006, the U.S. Department of Justice alleged certaincivil damages of approximately $5.0 million. The alleged damages relate to amatter the Company reported to federal authorities and the client in 2003involving three employees who engaged in unauthorized student loanconsolidations in connection with a client contract. The responsible employeeswere terminated at that time in 2003. The Company does not agree with theallegations regarding damages and has and will continue to engage in discussionswith the Department of Justice in an effort to amicably resolve the matter. TheCompany expects that actual damages incurred as a result of this incident, ifany, will be covered by insurance.

 

Tax Matters:

 

In 2004, the Company received notice of a proposed reassessment from aforeign taxing authority relating to certain matters occurring from 1998through 2001 regarding one of its subsidiaries. In September 2006, theCompany received the formal notice of reassessment in the amount of $13.9million including interest and penalties, converted as of December 31,2008 ($14.6 million converted as of December 31, 2006), and in December 2006the Company paid a deposit of $8.5 million. The Company maintains a reserve andbelieves it is adequate to address its exposure to this matter.

 

The Company is under audit by the State of Texas for alleged impropercollection of state sales tax on collection services. Under Texas law, bothclient and debtor need to be within the state to create a taxable transaction.The State of Texas issued an initial assessment, which was subsequently reducedto approximately $3.5 million after working with its clients, and was paid in March 2008.

 

Attorneys General:

 

From time to time, the Company receives subpoenas or other similar informationrequests from various states’ Attorneys General, requesting informationrelating to its Company’s debt collection practices in such states. The Companyresponds to such inquires or investigations and provide certain information tothe respective Attorneys General offices. The Company believes its incompliance with the laws of the states in which it does business relating todebt collection practices in all material respects. However, no assurance canbe given that any such inquiries or investigations will not result in a formalinvestigation or an enforcement action. Any such enforcement actions couldresult in fines as well as the suspension or termination of its ability toconduct business in such states.

 

Other:

 

The Company is involved in other legal proceedings, regulatoryinvestigations and tax examinations from time to time in the ordinary course ofits business. Management believes that none of these other legal proceedings,regulatory investigations or tax examinations will have a materially adverseeffect on the financial condition or results of operations of the Company.

 

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

**20.  Segment Reporting:**

 

The Company’s business consists of three operating divisions: ARM, CRMand Portfolio Management. The accounting policies of the segments are the sameas those described in note 2, “Accounting Policies.”

 

ARM provides accountsreceivable management services to consumer and commercial accounts for allmarket sectors including financial services, healthcare, retail and commercial,telecommunications, utilities, education, and government. ARM serves clients ofall sizes in local, regional and national markets in the United States, Canada,the United Kingdom, Australia and Latin America through offices in the UnitedStates, Canada, the Philippines, Latin America and the Caribbean. In additionto traditional accounts receivable collections, these services includedeveloping the client relationship beyond bad debt recovery and delinquencymanagement, and delivering cost-effective accounts receivable solutions to allmarket sectors. For the years ended December 31, 2008, 2007 and 2006, ARMreceived $1.0 billion, $724.1 million and $693.4 million, respectively, ofrevenue from U.S. customers, $46.8 million, $43.4 million and $36.0 million,respectively, of revenue from Canadian customers, $25.8 million, $24.3 millionand $25.5 million, respectively, of revenue from U.K. customers and $19.2million and $14.7 million and $3.5 million, respectively, of revenue fromAustralian customers. ARM also provides accounts receivable management servicesto Portfolio Management. ARM recorded revenue of $82.8 million and $109.1million from these services for the years ended December 31, 2008 and2007. ARM recorded revenue of $101.8 million and $12.0 million for theseservices for the periods from January 1, 2006 through November 15,2006 and July 13, 2006 through December 31, 2006, respectively.Included in ARM’s intercompany revenue for the years ended December 31,2008, 2007 and 2006 was $1.7 million, $12.8 million and $10.3 million,respectively, of commissions from the sale of portfolios by PortfolioManagement.

 

The CRM division providescustomer relationship management services to clients in the United States,Canada and Latin America through offices in the United States, Canada, thePhilippines, Panama and Barbados. For the years ended December 31, 2008,2007 and 2006, CRM received $351.7 million, $311.0 million and $238.5 million,respectively, from U.S. customers and $8.0 million, $16.6 million and $12.7million, respectively, from Canadian customers. For the years ended December 31,2008 and 2007, CRM received $1.4 million and $951,000, respectively, fromPanama customers. In November 2006, CRM began providing certain servicesto ARM. CRM recorded revenue of $2.9 million and $532,000 for these services forthe years ended December 31, 2008 and 2007, respectively.

 

Portfolio Management purchases and manages defaultedconsumer accounts receivable from consumer creditors such as banks, financecompanies, retail merchants, utilities, healthcare companies and other consumeroriented companies.

 

F-42

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Table of Contents

 

**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

**20.  Segment Reporting (continued):**

 

The following tablespresent the revenue, payroll and related expenses, selling, general andadministrative expenses, restructuring charges, income from operations beforedepreciation and amortization (including impairment of intangible assets),total assets, net of any intercompany balances and capital expenditures foreach segment.

 
| ** **                                                   | ** ** | **Successor**                                                                                            | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **For the Year Ended December 31, 2008  (amounts in thousands)** | ** ** |
| ** **                                                   | ** ** | **ARM**                                                                                                  | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenue                                                      |       | $                                                                                                        | 1,219,348  |   | $ | 361,096 |   | $ | 18,389 |   | $ | (85,692 | ) | $ | 1,513,141 |   |
| Payroll and  related expenses                                |       | 583,658                                                                                                  |       | 256,895 |   | 7,822 |   | (2,894 | ) | 845,481 |   |
| Selling, general  and admin. expenses                        |       | 496,881                                                                                                  |       | 61,723 |   | 86,533 |   | (82,798 | ) | 562,339 |   |
| Restructuring  charges                                       |       | 7,631                                                                                                    |       | 3,969 |   | — |   | — |   | 11,600 |   |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Income from  operations before depreciation and amortization |       | $                                                                                                        | 131,178    |   | $ | 38,509 |   | $ | (75,966 | ) | $ | — |   | $ | 93,721 |   |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Total assets,  net of intercompany balances                  |       | $                                                                                                        | 1,220,399  |   | $ | 283,328 |   | $ | 197,912 |   | $ | — |   | $ | 1,701,639 |   |
| Capital  expenditures                                        |       | $                                                                                                        | 24,134     |   | $ | 19,262 |   | $ | — |   | $ | — |   | $ | 43,396 |   |

** **
| ** **                                                   | ** ** | **Successor**                                                                                            | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **For the Year Ended December 31, 2007  (amounts in thousands)** | ** ** |
| ** **                                                   | ** ** | **ARM**                                                                                                  | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenue                                                      |       | $                                                                                                        | 915,603    |   | $ | 328,560 |   | $ | 150,909 |   | $ | (109,642 | ) | $ | 1,285,430 |   |
| Payroll and  related expenses                                |       | 426,177                                                                                                  |       | 246,655 |   | 7,651 |   | (532 | ) | 679,951 |   |
| Selling, general  and admin. expenses                        |       | 401,249                                                                                                  |       | 54,323 |   | 112,708 |   | (109,110 | ) | 459,170 |   |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Income from  operations before depreciation and amortization |       | $                                                                                                        | 88,177     |   | $ | 27,582 |   | $ | 30,550 |   | $ | — |   | $ | 146,309 |   |
|                                                         |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Total assets,  net of intercompany balances                  |       | $                                                                                                        | 913,711    |   | $ | 340,893 |   | $ | 423,395 |   | $ | — |   | $ | 1,677,999 |   |
| Capital expenditures                                         |       | $                                                                                                        | 16,226     |   | $ | 9,813 |   | $ | 2 |   | $ | — |   | $ | 26,041 |   |

 
| ** **                                                   | ** ** | **Successor**                                                                                                                            | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **For the period from July 13 through December 31, 2006  (amounts in thousands)** | ** ** |
| ** **                                                   | ** ** | **ARM**                                                                                                                                  | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                         |       |                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenue                                                      |       | $                                                                                                                                        | 109,989    |   | $ | 35,213 |   | $ | 13,489 |   | $ | (12,326 | ) | $ | 146,365 |   |
| Payroll and  related expenses                                |       | 50,351                                                                                                                                   |       | 28,167 |   | 1,001 |   | (354 | ) | 79,165 |   |
| Selling, general  and admin. expenses                        |       | 44,612                                                                                                                                   |       | 5,576 |   | 11,906 |   | (11,972 | ) | 50,122 |   |
|                                                         |       |                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Income from  operations before depreciation and amortization |       | $                                                                                                                                        | 15,026     |   | $ | 1,470 |   | $ | 582 |   | $ | — |   | $ | 17,078 |   |
|                                                         |       |                                                                                                                                     |       |   |   |   |   |   |   |   |   |
| Total assets,  net of intercompany balances                  |       | $                                                                                                                                        | 980,738    |   | $ | 287,750 |   | $ | 424,185 |   | $ | — |   | $ | 1,692,673 |   |
| Capital  expenditures                                        |       | $                                                                                                                                        | 2,266      |   | $ | 202 |   | $ | — |   | $ | — |   | $ | 2,468 |   |

 

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Table of Contents

 

**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

**20.  Segment Reporting (continued):**

 
| ** **                                                   | ** ** | **Predecessor**                                                                                                                            | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **For the period from January 1 through November 15, 2006  (amounts in thousands)** | ** ** |
| ** **                                                   | ** ** | **ARM**                                                                                                                                    | ** ** | **CRM** | ** ** | **Portfolio  Management** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|                                                         |       |                                                                                                                                       |       |   |   |   |   |   |   |   |   |
| Revenue                                                      |       | $                                                                                                                                          | 762,141    |   | $ | 215,949 |   | $ | 173,474 |   | $ | (101,763 | ) | $ | 1,049,801 |   |
| Payroll and  related expenses                                |       | 371,384                                                                                                                                    |       | 175,401 |   | 7,107 |   | (9 | ) | 553,883 |   |
| Selling, general  and admin. expenses                        |       | 326,636                                                                                                                                    |       | 39,148 |   | 111,120 |   | (101,754 | ) | 375,150 |   |
| Restructuring  charges                                       |       | 12,297                                                                                                                                     |       | 468 |   | — |   | — |   | 12,765 |   |
|                                                         |       |                                                                                                                                       |       |   |   |   |   |   |   |   |   |
| Income from  operations before depreciation and amortization |       | $                                                                                                                                          | 51,824     |   | $ | 932 |   | $ | 55,247 |   | $ | — |   | $ | 108,003 |   |
|                                                         |       |                                                                                                                                       |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                        |       | $                                                                                                                                          | 28,870     |   | $ | 11,925 |   | $ | — |   | $ | — |   | $ | 40,795 |   |

 

**21.  RelatedParty Transactions:**

 

From January 1, 2006through November 15, 2006, the compensation of Michael J. Barrist,President, and Chief Executive Officer of NCO, included the personal use by Mr. Barristof 25 hours per year of an aircraft partly owned by the Company. Mr. Barristreimbursed the Company for his personal use of the aircraft in excess of 25hours. For the period from January 1, 2006 through November 15, 2006,Mr. Barrist reimbursed the Company $203,000. Under Mr. Barrist’s newemployment agreement, which was effective November 15, 2006, Mr. Barristis entitled to 150 hours per year on the aircraft for both business andpersonal use, as determined by Mr. Barrist in his discretion.

 

The Company pays OEP amanagement fee of $3.0 million per year, plus reimbursement of expenses, formanagement, advice and related services.

 

OEP is managed by OEPHolding Corporation, a wholly owned indirect subsidiary of JP Morgan Chase &Co. (“JPM”), and JPM is a client of the Company. For the years ended December 31,2008 and 2007, the Company received fees for providing services to JPM of $14.8million and $10.0 million, respectively. For the periods from January 1,2006 through November 15, 2006 and July 13, 2006 through December 31,2006, the Company received fees for providing services to JPM of $5.9 millionand $965,000, respectively. At December 31, 2008 and 2007, the Company hadaccounts receivable of $9,000 and $138,000, respectively, due from JPM.Additionally, affiliates of Citigroup are co-investors of the Company, andCitigroup is a client of the Company. For the years ended December 31,2008 and 2007, the Company received fees for providing services to Citigroup of$69.5 million and $33.5 million, respectively. For the periods from January 1,2006 through November 15, 2006 and July 13, 2006 through December 31,2006, the Company received fees for providing services to Citigroup of $28.5million and $3.9 million, respectively. At December 31, 2008 and 2007, the Company had accounts receivableof $3.3 million and $1.9 million, respectively, due from Citigroup.

 

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**NCOGROUP, INC.**

**Notes toConsolidated Financial Statements (continued)**

 

**22.  RecentlyIssued and Proposed Accounting Pronouncements:**

 

*FASBStatement of Financial Accounting Standards No. 141 (revised 2007), “BusinessCombinations”:*

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (“SFAS 141(R)”), which replaces FASB Statement of FinancialAccounting Standards No. 141, “Business Combinations” (“SFAS 141”). WhileSFAS 141(R) retains the fundamental requirements of SFAS 141 to use thepurchase method for acquisitions, it broadens the scope to apply this method toall transactions in which one entity obtains control over one or more otherbusinesses. Among other things, SFAS 141(R) requires that acquiredbusinesses be recognized at their fair values at the date of acquisition,acquisition-related costs to be recognized separately from the acquisition,contingent assets and liabilities to be recognized at fair value at the date ofacquisition and restructuring costs of the acquirer to be recognized separatelyfrom the acquisition. SFAS 141 (R) is effective for the Company on January 1,2009. The Company is currently reviewing the standard to assess the impact ofthe adoption of SFAS 141(R).

 

*FASBStatement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”:*

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51,” (“SFAS160”). This statement establishes accounting and reporting standards thatrequire a noncontrolling interest, or minority interest, in a subsidiary to bepresented in the equity section of the consolidated balance sheet, net incomeattributable to the parent and to the noncontrolling interest to be presented onthe consolidated statement of income and sufficient disclosures to clearlydistinguish between the interests of the parent and the noncontrollinginterest, among other requirements. SFAS 160 is effective for the Company on January 1,2009. The Company is currently reviewing the standard to assess the impact ofthe adoption of SFAS 160.

 

*FASBStatement of Financial Accounting Standards No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.”*

 

In March 2008, the FASB issued Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities — an amendment of FASB Statement No. 133,”referred to as SFAS 161. This statement requires enhanced disclosures forderivative instruments and hedging activities that include how and why anentity uses derivatives, how these instruments and the related hedged items areaccounted for under SFAS 133 and related interpretations, and how derivativeinstruments and related hedged items affect the entity’s financial position,results of operations and cash flows. SFAS 161 is effective for the Company on January 1,2009. The Company is currently reviewing the standard to assess the impact ofthe adoption of SFAS 161.

 

*FASBStaff Position 142-3, “Determination of the Useful Life of Intangible Assets”:*

 

In April 2008, the FASB issued Staff Position142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”).FSP 142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible assets under SFAS No. 142, “Goodwill and Other IntangibleAssets”. FSP 142-3 is effective for the Company on January 1, 2009. TheCompany is currently reviewing FSP 142-3 to assess the impact of adoption.

 

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**NCOGROUP, INC.**

**Notes to Consolidated Financial Statements(continued)**

 

**23.  Allowancefor Doubtful Accounts:**

 

The following table presentsthe activity in the allowance for doubtful accounts (amounts in thousands):

 
| ** **                                                        | ** ** | ** **          | ** ** | **Additions**       | ** ** | ** **        | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                        | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Charged**       | ** ** | ** **        | ** ** | **Balance at** | ** ** |
| ** **                                                        | ** ** | **beginning**       | ** ** | **costs and**  | ** ** | **to other** | ** ** | ** **        | ** ** | **end of** | ** ** |
| ** **                                                        | ** ** | **of year**    | ** ** | **expenses**        | ** ** | **accounts**      | ** ** | **Deductions(1)** | ** ** | **year** | ** ** |
| *Successor:*                                                      |       |                |       |                |       |              |       |              |       |   |   |
| Year ended  December 31, 2008:                               |       |                |       |                |       |              |       |              |       |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts                                  |       | $                   | 3,137      |                | $          | 3,030             |       | $                 | 3,786      |   | $ | (4,945 | ) | $ | 5,008 |   |
|                                                              |       |                |       |                |       |              |       |              |       |   |   |
| Year ended  December 31, 2007:                               |       |                |       |                |       |              |       |              |       |   |   |
| Allowance for  doubtful accounts                                  |       | $                   | —     |                | $          | 4,806             |       | $                 | —     |   | $ | (1,669 | ) | $ | 3,137 |   |
|                                                              |       |                |       |                |       |              |       |              |       |   |   |
| Period from  July 13, 2006 through December 31, 2006:   |       |                |       |                |       |              |       |              |       |   |   |
| Allowance for  doubtful accounts                                  |       | $                   | —     |                | $          | —            |       | $                 | —     |   | $ | — |   | $ | — |   |
|                                                              |       |                |       |                |       |              |       |              |       |   |   |
| *Predecessor:*                                                    |       |                |       |                |       |              |       |              |       |   |   |
| Period from  January 1, 2006 through November 15, 2006: |       |                |       |                |       |              |       |              |       |   |   |
| Allowance for  doubtful accounts                                  |       | $                   | 8,079      |                | $          | 3,931             |       | $                 | —     |   | $ | (2,555 | ) | $ | 9,455 |   |

 

----

(1)    Uncollectibleaccounts written off, net of recoveries.

 

**24.  SubsidiaryGuarantor Financial Information:**

 

The Notes are fully and unconditionally guaranteed,jointly and severally, by certain domestic wholly owned subsidiaries of theCompany (collectively, the “Guarantors”). Non-guarantors consist of allnon-domestic subsidiaries, certain subsidiaries engaged in financing thepurchase of delinquent accounts receivable portfolios, portfolio joint ventures(which are engaged in portfolio financing transactions) and certain immaterialsubsidiaries (collectively, the “Non-Guarantors”). The following tables presentthe consolidating financial information for the Company (Parent), theGuarantors and the Non-Guarantors, together with eliminations, as of and forthe periods indicated.

 

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** **

**24.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2008**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           |       |       |       |           |       |               |       |             |       |             |       |
| ** **                                                                           |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 15,334             |       | $                | 14,546     |             | $          | — |   | $ | 29,880 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 210,520        |       | 8,129              |       | —           |       | 218,649          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 19,191         |       | 50,815             |       | —           |       | 70,006           |       |
| Deferred income  taxes                                                               |       | 4,057      |       | 29,908         |       | 251                |       | —           |       | 34,216           |       |
| Prepaid expenses  and other current assets                                           |       | 2,027      |       | 51,082         |       | 13,486             |       | —           |       | 66,595           |       |
| Total current  assets                                                                |       | 6,084      |       | 326,035        |       | 87,227             |       | —           |       | 419,346          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and  equipment, net                                                         |       | —     |       | 101,453        |       | 36,819             |       | —           |       | 138,272          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 500,272        |       | 64,345             |       | —           |       | 564,617          |       |
| Trade name                                                                           |       | —     |       | 82,619         |       | 2,847              |       | —           |       | 85,466           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 311,056        |       | 22,895             |       | —           |       | 333,951          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 46,401         |       | 69,252             |       | —           |       | 115,653          |       |
| Investment in  subsidiaries                                                          |       | 828,883    |       | 24,771         |       | —             |       | (853,654         | )          | —           |       |
| Other assets                                                                         |       | 15,002     |       | 51,715         |       | (22,383            | )          | —           |       | 44,334           |       |
| Total other  assets                                                                  |       | 843,885    |       | 1,016,834      |       | 136,956            |       | (853,654         | )          | 1,144,021        |       |
| Total assets                                                                         |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  current portion                                                     |       | $          | 6,054      |           | $          | 594                |       | $                | 23,911     |             | $          | — |   | $ | 30,559 |   |
| Intercompany (receivable)  loan                                                      |       | (30,025    | )          | 10,812         |       | 98,188             |       | (78,975          | )          | —           |       |
| Income taxes  payable                                                                |       | —     |       | —         |       | 3,543              |       | —           |       | 3,543            |       |
| Accounts payable                                                                     |       | —     |       | 26,927         |       | (8,901             | )          | —           |       | 18,026           |       |
| Accrued expenses                                                                     |       | 30,440     |       | 89,444         |       | 8,590              |       | —           |       | 128,474          |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 34,173         |       | 12,293             |       | —           |       | 46,466           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 40,392         |       | 339                |       | —           |       | 40,731           |       |
| Total current  liabilities                                                           |       | 6,469      |       | 202,342        |       | 137,963            |       | (78,975          | )          | 267,799          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  net of current portion                                              |       | 644,646    |       | 389,902        |       | 13,969             |       | —           |       | 1,048,517        |       |
| Deferred income  taxes                                                               |       | (63,432    | )          | 119,135        |       | 11,662             |       | —           |       | 67,365           |       |
| Other long-term  liabilities                                                         |       | 1,300      |       | 22,212         |       | 10,657             |       | —           |       | 34,169           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Minority  interest                                                                   |       | —     |       | —         |       | 22,803             |       | —           |       | 22,803           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity                                                           |       | 260,986    |       | 710,731        |       | 63,948             |       | (774,679         | )          | 260,986          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 849,969    |           | $          | 1,444,322          |       | $                | 261,002    |             | $          | (853,654 | ) | $ | 1,701,639 |   |

 

F-47

----

Table of Contents

** **

**24.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingBalance Sheet**

**December 31,2007**

**(Amountsin thousands)**

 
| ** **                                                                           | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                                                           |       |       |       |           |       |               |       |             |       |             |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                                                      |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash  equivalents                                                           |       | $          | —     |           | $          | 17,755             |       | $                | 13,528     |             | $          | — |   | $ | 31,283 |   |
| Accounts  receivable, trade, net of allowance for doubtful accounts                  |       | —     |       | 162,030        |       | 21,414             |       | —           |       | 183,444          |       |
| Purchased  accounts receivable, current portion                                      |       | —     |       | 7,899          |       | 64,718             |       | —           |       | 72,617           |       |
| Deferred income  taxes                                                               |       | 430        |       | 15,988         |       | (139               | )          | —           |       | 16,279           |       |
| Prepaid expenses  and other current assets                                           |       | 1,830      |       | 21,402         |       | 9,512              |       | —           |       | 32,744           |       |
| Total current  assets                                                                |       | 2,260      |       | 225,074        |       | 109,033            |       | —           |       | 336,367          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Property and  equipment, net                                                         |       | —     |       | 88,579         |       | 45,880             |       | —           |       | 134,459          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Other assets:                                                                        |       |       |       |           |       |               |       |             |       |             |       |
| Goodwill                                                                             |       | —     |       | 545,543        |       | 69,201             |       | —           |       | 614,744          |       |
| Trade name                                                                           |       | —     |       | 93,766         |       | 2,847              |       | —           |       | 96,613           |       |
| Customer  relationships and other intangible assets, net of accumulated amortization |       | —     |       | 250,247        |       | 29,855             |       | —           |       | 280,102          |       |
| Purchased  accounts receivable, net of current portion                               |       | —     |       | 18,038         |       | 154,930            |       | —           |       | 172,968          |       |
| Deferred income  taxes                                                               |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Investment in  subsidiaries                                                          |       | 802,824    |       | 89,557         |       | —             |       | (892,381         | )          | —           |       |
| Other assets                                                                         |       | 17,303     |       | 23,543         |       | 1,900              |       | —           |       | 42,746           |       |
| Total other  assets                                                                  |       | 820,127    |       | 1,020,694      |       | 258,733            |       | (892,381         | )          | 1,207,173        |       |
| Total assets                                                                         |       | $          | 822,387    |           | $          | 1,334,347          |       | $                | 413,646    |             | $          | (892,381 | ) | $ | 1,677,999 |   |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                                                                |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  current portion                                                     |       | $          | 9,341      |           | $          | 209                |       | $                | 15,094     |             | $          | — |   | $ | 24,644 |   |
| Intercompany  (receivable) loan                                                      |       | (188,345   | )          | 91,563         |       | 96,782             |       | —           |       | —           |       |
| Income taxes  payable                                                                |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Accounts payable                                                                     |       | 750        |       | 16,349         |       | 4,358              |       | —           |       | 21,457           |       |
| Accrued expenses                                                                     |       | 9,566      |       | 63,082         |       | 21,503             |       | —           |       | 94,151           |       |
| Accrued  compensation and related expenses                                           |       | —     |       | 18,269         |       | 13,948             |       | —           |       | 32,217           |       |
| Deferred  revenue, current portion                                                   |       | —     |       | 1,427          |       | —             |       | —           |       | 1,427            |       |
| Total current  liabilities                                                           |       | (168,688   | )          | 190,899        |       | 151,685            |       | —           |       | 173,896          |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  liabilities:                                                              |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt,  net of current portion                                              |       | 627,604    |       | 236,096        |       | 39,352             |       | —           |       | 903,052          |       |
| Deferred income  taxes                                                               |       | (45,193    | )          | 141,178        |       | 30,418             |       | —           |       | 126,403          |       |
| Other long-term  liabilities                                                         |       | 619        |       | 4,881          |       | 12,155             |       | —           |       | 17,655           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Minority  interest                                                                   |       | —     |       | —         |       | 48,948             |       | —           |       | 48,948           |       |
|                                                                                 |       |       |       |           |       |               |       |             |       |             |       |
| Stockholders’  equity                                                           |       | 408,045    |       | 761,293        |       | 131,088            |       | (892,381         | )          | 408,045          |       |
| Total  liabilities and stockholders’ equity                                     |       | $          | 822,387    |           | $          | 1,334,347          |       | $                | 413,646    |             | $          | (892,381 | ) | $ | 1,677,999 |   |

 

F-48

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Table ofContents

 

**24.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theYear Ended December 31, 2008**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                     |       |       |       |           |       |               |       |             |       |             |       |
| Services                                      |       | $          | —     |           | $          | 1,487,221          |       | $                | 345,298    |             | $          | (340,409 | ) | $ | 1,492,110 |   |
| Portfolio                                     |       | —     |       | 20,994         |       | (2,965             | )          | —           |       | 18,029           |       |
| Portfolio sales                               |       | —     |       | 563            |       | 2,439              |       | —           |       | 3,002            |       |
| Total revenues                                |       | —     |       | 1,508,778      |       | 344,772            |       | (340,409         | )          | 1,513,141        |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs  and expenses:                |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and  related expenses                 |       | 15         |       | 868,516        |       | 222,085            |       | (245,135         | )          | 845,481          |       |
| Selling, general  and administrative expenses |       | 4,200      |       | 517,128        |       | 136,285            |       | (95,274          | )          | 562,339          |       |
| Depreciation and  amortization expense        |       | —     |       | 92,176         |       | 29,148             |       | —           |       | 121,324          |       |
| Impairment of  intangible assets              |       | —     |       | 268,908        |       | 20,584             |       | —           |       | 289,492          |       |
| Restructuring  charges                        |       | —     |       | 6,050          |       | 5,550              |       | —           |       | 11,600           |       |
| Total operating  costs and expenses           |       | 4,215      |       | 1,752,778      |       | 413,652            |       | (340,409         | )          | 1,830,236        |       |
| (Loss) income  from operations                |       | (4,215     | )          | (244,000       | )          | (68,880            | )          | —           |       | (317,095         | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Other income  (expense):                      |       |       |       |           |       |               |       |             |       |             |       |
| Interest and  investment income               |       | (10,396    | )          | 11,848         |       | (361               | )          | —           |       | 1,091            |       |
| Interest expense                              |       | (65,080    | )          | (29,183        | )          | (568               | )          | —           |       | (94,831          | )          |
| Interest  (expense) income to affiliate       |       | (2,660     | )          | 9,239          |       | (6,579             | )          | —           |       | —           |       |
| Subsidiary  income                            |       | (281,167   | )          | (49,538        | )          | —             |       | 330,705          |       | —           |       |
| Other income (expense)  net                   |       | —     |       | (16,468        | )          | —             |       | —           |       | (16,468          | )          |
|                                          |       | (359,303)  |       | (74,102        | )          | (7,508             | )          | 330,705          |       | (110,208         | )          |
| (Loss) income  before income taxes            |       | (363,518   | )          | (318,102       | )          | (76,388            | )          | 330,705          |       | (427,303         | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Income tax  (benefit) expense                 |       | (26,412    | )          | (37,315        | )          | (8,220             | )          | —           |       | (71,947          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income  before minority interest       |       | (337,106   | )          | (280,787       | )          | (68,168            | )          | 330,705          |       | (355,356         | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Minority interest                             |       | —     |       | —         |       | 18,250             |       | —           |       | 18,250           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income                            |       | $          | (337,106   | )              | $          | (280,787           | )          | $                | (49,918    | )                | $          | 330,705 |   | $ | (337,106 | ) |

 

F-49

----

Table of Contents

** **

**24.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For theYear Ended December 31, 2007**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                     |       |       |       |           |       |               |       |             |       |             |       |
| Services                                      |       | $          | —     |           | $          | 1,141,954          |       | $                | 348,696    |             | $          | (358,726 | ) | $ | 1,131,924 |   |
| Portfolio                                     |       | —     |       | 32,804         |       | 99,609             |       | —           |       | 132,413          |       |
| Portfolio sales                               |       | —     |       | 6,474          |       | 14,619             |       | —           |       | 21,093           |       |
| Total revenues                                |       | —     |       | 1,181,232      |       | 462,924            |       | (358,726         | )          | 1,285,430        |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs  and expenses:                |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and  related expenses                 |       | 13         |       | 694,199        |       | 234,121            |       | (248,382         | )          | 679,951          |       |
| Selling, general  and administrative expenses |       | 3,883      |       | 391,315        |       | 174,316            |       | (110,344         | )          | 459,170          |       |
| Depreciation and  amortization expense        |       | —     |       | 76,492         |       | 25,857             |       | —           |       | 102,349          |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total operating  costs and expenses           |       | 3,896      |       | 1,162,006      |       | 434,294            |       | (358,726         | )          | 1,241,470        |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income  from operations                |       | (3,896     | )          | 19,226         |       | 28,630             |       | —           |       | 43,960           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Other income  (expense):                      |       |       |       |           |       |               |       |             |       |             |       |
| Interest and  investment income               |       | (10        | )          | 1,835          |       | 810                |       | —           |       | 2,635            |       |
| Interest expense                              |       | (65,638    | )          | (21,098        | )          | (8,558             | )          | —           |       | (95,294          | )          |
| Interest  (expense) income to affiliate       |       | (5,923     | )          | 12,655         |       | (6,732             | )          | —           |       | —           |       |
| Subsidiary  income                            |       | 5,631      |       | 3,405          |       | —             |       | (9,036           | )          | —           |       |
| Other income  (expense), net                  |       | —     |       | 3,608          |       | —             |       | —           |       | 3,608            |       |
|                                          |       | (65,940)   |       | 405            |       | (14,480            | )          | (9,036           | )          | (89,051          | )          |
| (Loss) income  before income taxes            |       | (69,836    | )          | 19,631         |       | 14,150             |       | (9,036           | )          | (45,091          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Income tax (benefit)  expense                 |       | (38,114    | )          | 17,973         |       | 4,037              |       | —           |       | (16,104          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income  before minority interest       |       | (31,722    | )          | 1,658          |       | 10,113             |       | (9,036           | )          | (28,987          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Minority interest                             |       | —     |       | —         |       | (2,735             | )          | —           |       | (2,735           | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss) income                             |       | $          | (31,722    | )              | $          | 1,658              |       | $                | 7,378      |             | $          | (9,036 | ) | $ | (31,722 | ) |

 

F-50

----

Table of Contents

 

**24.  Subsidiary Guarantor Financial Information(continued):**

 

**NCOGROUP, INC.**

**ConsolidatingStatement of Operations**

**For thePeriod from July 13, 2006 (date of inception) through December 31,2006**

**(Amountsin thousands)**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                     |       |       |       |           |       |               |       |             |       |             |       |
| Services                                      |       | $          | —     |           | $          | 137,458            |       | $                | 37,845     |             | $          | (42,495 | ) | $ | 132,808 |   |
| Portfolio                                     |       | —     |       | 620            |       | 12,937             |       | —           |       | 13,557           |       |
| Total revenues                                |       | —     |       | 138,078        |       | 50,782             |       | (42,495          | )          | 146,365          |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs  and expenses:                |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and  related expenses                 |       | 2          |       | 82,990         |       | 26,696             |       | (30,523          | )          | 79,165           |       |
| Selling, general  and administrative expenses |       | 458        |       | 43,278         |       | 18,358             |       | (11,972          | )          | 50,122           |       |
| Depreciation and  amortization expense        |       | —     |       | 79,552         |       | 2,574              |       | —           |       | 82,126           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total operating  costs and expenses           |       | 460        |       | 205,820        |       | 47,628             |       | (42,495          | )          | 211,413          |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income  from operations                |       | (460       | )          | (67,742        | )          | 3,154              |       | —           |       | (65,048          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Other income  (expense):                      |       |       |       |           |       |               |       |             |       |             |       |
| Interest and  investment income               |       | 17         |       | (19            | )          | 346                |       | —           |       | 344              |       |
| Interest expense                              |       | (11,437    | )          | (2,118         | )          | (1,423             | )          | —           |       | (14,978          | )          |
| Interest (expense)  income to affiliate       |       | (3,260     | )          | 3,608          |       | (348               | )          | —           |       | —           |       |
| Subsidiary  income                            |       | (66,261    | )          | 770            |       | —             |       | 65,491           |       | —           |       |
| Other income  (expense), net                  |       | —     |       | 212            |       | —             |       | —           |       | 212              |       |
|                                          |       | (80,941)   |       | 2,453          |       | (1,425             | )          | 65,491           |       | (14,422          | )          |
| (Loss) income  before income taxes            |       | (81,401    | )          | (65,289        | )          | 1,729              |       | 65,491           |       | (79,470          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Income tax  (benefit) expense                 |       | (5,296     | )          | 1,121          |       | 653                |       | —           |       | (3,522           | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income  before minority interest       |       | (76,105    | )          | (66,410        | )          | 1,076              |       | 65,491           |       | (75,948          | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Minority  interest                            |       | —     |       | —         |       | (157               | )          | —           |       | (157             | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Net (loss)  income                            |       | $          | (76,105    | )              | $          | (66,410            | )          | $                | 919        |             | $          | 65,491 |   | $ | (76,105 | ) |

 

F-51

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Table of Contents

 

**24.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC.**

**Consolidating Statement of Operations**

**For the Period from January 1, 2006 through November 15,2006**

**(Amounts in thousands)**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Revenues:                                     |       |       |       |           |       |               |       |             |       |             |       |
| Services                                      |       | $          | —     |           | $          | 926,785            |       | $                | 256,983    |             | $          | (308,430 | ) | $ | 875,338 |   |
| Portfolio                                     |       | —     |       | 38,180         |       | 113,526            |       | —           |       | 151,706          |       |
| Portfolio sales                               |       | —     |       | 10,762         |       | 11,995             |       | —           |       | 22,757           |       |
| Total revenues                                |       | —     |       | 975,727        |       | 382,504            |       | (308,430         | )          | 1,049,801        |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Operating costs and expenses:                 |       |       |       |           |       |               |       |             |       |             |       |
| Payroll and related expenses                  |       | 173        |       | 581,174        |       | 179,212            |       | (206,676         | )          | 553,883          |       |
| Selling, general and administrative  expenses |       | 6,187      |       | 330,728        |       | 139,989            |       | (101,754         | )          | 375,150          |       |
| Depreciation and amortization expense         |       | 230        |       | 33,225         |       | 13,240             |       | —           |       | 46,695           |       |
| Restructuring charge                          |       | —     |       | 10,792         |       | 1,973              |       | —           |       | 12,765           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Total operating costs and expenses            |       | 6,590      |       | 955,919        |       | 334,414            |       | (308,430         | )          | 988,493          |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| (Loss) income from operations                 |       | (6,590     | )          | 19,808         |       | 48,090             |       | —           |       | 61,308           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Other income (expense):                       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and investment income                |       | 101        |       | 1,216          |       | 519                |       | —           |       | 1,836            |       |
| Interest expense                              |       | (8,639     | )          | (5,877         | )          | (12,127            | )          | —           |       | (26,643          | )          |
| Interest (expense) income to affiliate        |       | (32,064    | )          | 34,280         |       | (2,216             | )          | —           |       | —           |       |
| Subsidiary income                             |       | 51,768     |       | 15,187         |       | —             |       | (66,955          | )          | —           |       |
| Other income (expense), net                   |       | —     |       | 3,165          |       | —             |       | —           |       | 3,165            |       |
|                                          |       | 11,166     |       | 47,971         |       | (13,824            | )          | (66,955          | )          | (21,642          | )          |
| Income before income taxes                    |       | 4,576      |       | 67,779         |       | 34,266             |       | (66,955          | )          | 39,666           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Income tax (benefit) expense                  |       | (16,458    | )          | 18,688         |       | 12,512             |       | —           |       | 14,742           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Income before minority interest               |       | 21,034     |       | 49,091         |       | 21,754             |       | (66,955          | )          | 24,924           |       |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Minority interest                             |       | —     |       | —         |       | (3,890             | )          | —           |       | (3,890           | )          |
|                                          |       |       |       |           |       |               |       |             |       |             |       |
| Net income                                    |       | $          | 21,034     |           | $          | 49,091             |       | $                | 17,864     |             | $          | (66,955 | ) | $ | 21,034 |   |

 

F-52

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Tableof Contents

 

**24.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**Consolidating Statement of Cash Flows**

**For the Year Ended December 31, 2008**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
|                                                               |       |       |       |           |       |               |       |             |       |
| Net cash (used in) provided by operating  activities               |       | $          | (7,991     | )              | $          | 55,591             |       | $                | 46,133     |   | $ | 93,733 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (64,651        | )          | (61,896            | )          | (126,547         | )          |
| Collections applied to principal of  purchased accounts receivable |       | —     |       | 16,634         |       | 72,691             |       | 89,325           |       |
| Proceeds from sales and resales of  purchased accounts receivable  |       | —     |       | 1,274          |       | 3,483              |       | 4,757            |       |
| Purchases of property and equipment                                |       | —     |       | (34,756        | )          | (8,640             | )          | (43,396          | )          |
| Proceeds from bonds and notes receivable                           |       | —     |       | 1,122          |       | —             |       | 1,122            |       |
| Net cash paid for acquisitions and related  costs                  |       | —     |       | (324,207       | )          | (25,213            | )          | (349,420         | )          |
| Net cash used in investing activities                              |       | —     |       | (404,584       | )          | (19,575            | )          | (424,159         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (215           | )          | (35,261            | )          | (35,476          | )          |
| Borrowings under notes payable                                     |       | —     |       | (336           | )          | 22,027             |       | 21,691           |       |
| Net borrowings under revolving credit  facility                    |       | 34,500     |       | —         |       | —             |       | 34,500           |       |
| Repayments of borrowings under senior term  loan                   |       |       |       | (10,745        | )          | —             |       | (10,745          | )          |
| Borrowings under senior term loan, net                             |       | —     |       | 134,135        |       | —             |       | 134,135          |       |
| Borrowings under (repayments of)  intercompany notes payable       |       | (219,189   | )          | 228,040        |       | (8,851             | )          | —           |       |
| Payment of fees to acquire debt                                    |       | (10        | )          | (4,307         | )          | —             |       | (4,317           | )          |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | 2,436              |       | 2,436            |       |
| Return of investment in subsidiary to  minority interest           |       | —     |       | —         |       | (12,242            | )          | (12,242          | )          |
| Issuance of stock, net                                             |       | 219,722    |       | —         |       | —             |       | 219,722          |       |
| Payment of dividends                                               |       | (17,500    | )          | —         |       | —             |       | (17,500          | )          |
| Net cash provided by (used in) financing  activities               |       | 17,523     |       | 346,572        |       | (31,891            | )          | 332,204          |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | (9,532     | )          | —         |       | 6,351              |       | (3,181           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net (decrease) increase in cash and cash  equivalents              |       | —     |       | (2,421         | )          | 1,018              |       | (1,403           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of  the period              |       | —     |       | 17,755         |       | 13,528             |       | 31,283           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the  period                    |       | $          | —     |           | $          | 15,334             |       | $                | 14,546     |   | $ | 29,880 |   |

 

F-53

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Tableof Contents

 

**24.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**Consolidating Statement of Cash Flows**

**For the Year Ended December 31, 2007**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
|                                                               |       |       |       |           |       |               |       |             |       |
| Net cash (used in) provided by operating  activities               |       | $          | (35,328    | )              | $          | 63,695             |       | $                | 15,628     |   | $ | 43,995 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (7,955         | )          | (117,328           | )          | (125,283         | )          |
| Collections applied to principal of  purchased accounts receivable |       | —     |       | 8,196          |       | 69,032             |       | 77,228           |       |
| Proceeds from sales and resales of  purchased accounts receivable  |       | —     |       | 11,318         |       | 32,843             |       | 44,161           |       |
| Purchases of property and equipment                                |       | —     |       | (17,658        | )          | (8,383             | )          | (26,041          | )          |
| Proceeds from bonds and notes receivable                           |       | —     |       | 6,097          |       | —             |       | 6,097            |       |
| Net cash paid for acquisitions and related  costs                  |       | —     |       | (4,408         | )          | (4,473             | )          | (8,881           | )          |
| Net cash used in investing activities                              |       | —     |       | (4,410         | )          | (28,309            | )          | (32,719          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (5,102         | )          | (45,623            | )          | (50,725          | )          |
| Borrowings under notes payable                                     |       | —     |       | 5,782          |       | 41,334             |       | 47,116           |       |
| Net borrowings under revolving credit  facility                    |       | 11,000     |       | —         |       | —             |       | 11,000           |       |
| Repayment of borrowings under senior term  loan                    |       | (4,650     | )          | —         |       | —             |       | (4,650           | )          |
| Borrowings under (repayment of)  intercompany notes payable        |       | 21,684     |       | (49,458        | )          | 27,774             |       | —           |       |
| Payment of fees to acquire debt                                    |       | (200       | )          | (835           | )          | —             |       | (1,035           | )          |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | 2,359              |       | 2,359            |       |
| Return of investment in subsidiary to  minority interest           |       | —     |       | —         |       | (6,934             | )          | (6,934           | )          |
| Net cash provided by (used in) financing  activities               |       | 27,834     |       | (49,613        | )          | 18,910             |       | (2,869           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | 7,155      |       | —         |       | (4,982             | )          | 2,173            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net (decrease) increase in cash and cash  equivalents              |       | (339       | )          | 9,672          |       | 1,247              |       | 10,580           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of  the period              |       | 339        |       | 8,083          |       | 12,281             |       | 20,703           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the  period                    |       | $          | —     |           | $          | 17,755             |       | $                | 13,528     |   | $ | 31,283 |   |

 

F-54

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Table of Contents

 

**24.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**Consolidating Statement of Cash Flows**

**For the Period from July 13, 2006 (date of inception)through December 31, 2006**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
|                                                               |       |       |       |           |       |               |       |             |       |
| Net cash (used in) provided by operating  activities               |       | $          | (9,077     | )              | $          | 2,792              |       | $                | 1,328      |   | $ | (4,957 | ) |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (999           | )          | (28,710            | )          | (29,709          | )          |
| Collections applied to principal of  purchased accounts receivable |       | —     |       | 4,383          |       | 9,194              |       | 13,577           |       |
| Proceeds from sales and resales of  purchased accounts receivable  |       | —     |       | 326            |       | 2,475              |       | 2,801            |       |
| Purchases of property and equipment                                |       | —     |       | (2,027         | )          | (441               | )          | (2,468           | )          |
| Proceeds from bonds and notes receivable                           |       | —     |       | 82             |       | —             |       | 82               |       |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | —             |       | —           |       |
| Distributions to minority interest                                 |       | —     |       | —         |       | —             |       | —           |       |
| Net cash paid for acquisitions and related  costs                  |       | (338,908   | )          | (617,932       | )          | (17,772            | )          | (974,612         | )          |
| Net cash used in investing activities                              |       | (338,908   | )          | (616,167       | )          | (35,254            | )          | (990,329         | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (681           | )          | (4,142             | )          | (4,823           | )          |
| Borrowings under notes payable                                     |       | —     |       | —         |       | 5,096              |       | 5,096            |       |
| Borrowings in connection with the  Transaction                     |       | 594,595    |       | 235,405        |       | —             |       | 830,000          |       |
| Net repayments of revolving credit facility                        |       | (193,300   | )          | —         |       | —             |       | (193,300         | )          |
| Repayment of intercompany notes payable                            |       | (432,229   | )          | 391,361        |       | 40,868             |       | —           |       |
| Payment of fees to acquire debt                                    |       | (16,708    | )          | (7,347         | )          | —             |       | (24,055          | )          |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | 2,132              |       | 2,132            |       |
| Return of investment in subsidiary to  minority interest           |       | —     |       | —         |       | (241               | )          | (241             | )          |
| Issuance of stock, net                                             |       | 395,966    |       | —         |       | —             |       | 395,966          |       |
| Net cash provided by financing activities                          |       | 348,324    |       | 618,738        |       | 43,713             |       | 1,010,775        |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | —     |       | —         |       | 2,494              |       | 2,494            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net increase in cash and cash equivalents                          |       | 339        |       | 5,363          |       | 12,281             |       | 17,983           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of  the period              |       | —     |       | 2,720          |       | —             |       | 2,720            |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the  period                    |       | $          | 339        |           | $          | 8,083              |       | $                | 12,281     |   | $ | 20,703 |   |

 

F-55

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Table of Contents

 

**24.  SubsidiaryGuarantor Financial Information (continued):**

 

**NCO GROUP, INC**

**Consolidating Statement of Cash Flows**

**For the Period from January 1, 2006 through November 15,2006**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|
|                                                               |       |       |       |           |       |               |       |             |       |
| Net cash (used in) provided by operating  activities               |       | $          | (2,710     | )              | $          | 38,823             |       | $                | 73,559     |   | $ | 109,672 |   |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from investing activities:                              |       |       |       |           |       |               |       |             |       |
| Purchases of accounts receivable                                   |       | —     |       | (8,552         | )          | (73,287            | )          | (81,839          | )          |
| Collections applied to principal of  purchased accounts receivable |       | —     |       | 17,650         |       | 53,324             |       | 70,974           |       |
| Proceeds from sales and resales of  purchased accounts receivable  |       | —     |       | 11,580         |       | 18,971             |       | 30,551           |       |
| Purchases of property and equipment                                |       | —     |       | (29,275        | )          | (11,520            | )          | (40,795          | )          |
| Proceeds from bonds and notes receivable                           |       | —     |       | 1,033          |       | —             |       | 1,033            |       |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | 12,720             |       | 12,720           |       |
| Net cash paid for acquisitions and related  costs                  |       | —     |       | (1,928         | )          | (6,662             | )          | (8,590           | )          |
| Net cash used in investing activities                              |       | —     |       | (9,492         | )          | (6,454             | )          | (15,946          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash flows from financing activities:                              |       |       |       |           |       |               |       |             |       |
| Repayment of notes payable                                         |       | —     |       | (668           | )          | (53,009            | )          | (53,677          | )          |
| Borrowings under notes payable                                     |       | —     |       | —         |       | 17,670             |       | 17,670           |       |
| Net borrowings under (repayments of)  revolving credit facility    |       | 61,600     |       | (2,800         | )          | —             |       | 58,800           |       |
| Repayment of convertible notes                                     |       | (125,000   | )          | —         |       | —             |       | (125,000         | )          |
| Repayment of intercompany notes payable                            |       | 55,830     |       | (22,149        | )          | (33,681            | )          | —           |       |
| Payment of fees to acquire debt                                    |       | —     |       | (12            | )          | —             |       | (12              | )          |
| Investment in subsidiary by minority  interest                     |       | —     |       | —         |       | 4,000              |       | 4,000            |       |
| Return of investment in subsidiary to  minority interest           |       | —     |       | —         |       | (1,597             | )          | (1,597           | )          |
| Issuance of common stock                                           |       | 3,939      |       | —         |       | —             |       | 3,939            |       |
| Net cash used in financing activities                              |       | (3,631     | )          | (25,629        | )          | (66,617            | )          | (95,877          | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Effect of exchange rate on cash                                    |       | —     |       | —         |       | (1,180             | )          | (1,180           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Net (decrease) increase in cash and cash  equivalents              |       | (6,341     | )          | 3,702          |       | (692               | )          | (3,331           | )          |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at beginning of  the period              |       | 100        |       | 5,093          |       | 18,523             |       | 23,716           |       |
|                                                               |       |       |       |           |       |               |       |             |       |
| Cash and cash equivalents at end of the  period                    |       | $          | (6,241     | )              | $          | 8,795              |       | $                | 17,831     |   | $ | 20,385 |   |

 

F-56

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